Bridge over ocean
1 December 2014 CFA Institute Journal Review

Masculinity, Testosterone, and Financial Misreporting (Digest Summary)

  1. Neeti Goyal

The links among wrongdoing, senior management’s behavior, and senior management’s facial masculinity have been much debated. The authors argue that firms whose CEO has a more masculine face experience a greater incidence of intentional financial misreporting.

What’s Inside?

Earlier researchers have established links between facial features and masculine behavior in males and between masculine behavior and financial decision making. The authors expand on the previous research to determine that CEOs with more masculine faces do more misreporting. Hence, facial structure is an important factor in determining the “style” of a CEO.

How Is This Research Useful to Practitioners?

Numerous studies have linked CEO style with a firm’s financial metrics. Now, researchers are identifying links between CEO style and nonfinancial metrics. The authors argue that the facial width-to-height ratio (fWHR) can capture variation in CEO behavior with respect to financial reporting habits. Some researchers believe that this link is caused by the hormone testosterone, but behavior is a complex mechanism and consists of many factors in addition to hormonal or biological ones.

Nevertheless, the relationship between a CEO’s facial masculinity and corporate misreporting habits is strong. Facial masculinity appears to be linked with masculine behavior in males, which is described in terms of risk taking, aggression, desire to cheat, and egocentric nature. The relationship stands true even in cases of insider trading and option backdating. The authors also argue that overconfidence is not a part of masculine behavior.

They argue specifically that a higher incidence of intentional misreporting by CEOs with more masculine faces occurs. The research is a useful contribution in the discipline of finance that establishes links between human psychology and individual performance because personal traits of senior managers affect their corporate decision-making abilities.

How Did the Authors Conduct This Research?

The fWHR is estimated by measuring the distance between cheekbones and the height of the upper face from the photos of 1,136 male CEOs of S&P 1500 companies for the year 2009. For the period of 1996–2010, a dataset of 3,909 firm-years is constructed for each CEO. The F-score, a measure of accounting manipulation, is used to identify firms with misreporting practices.

A multivariate regression of misreporting, after the authors control for exogenous factors, shows that the chance of misreporting is 98% higher for CEOs with above-median fWHRs — that is, a more masculine face — than for CEOs with below-median fWHRs. The authors also regress the data on overconfidence by backdating stock options and considering insider trading against fWHR; the model stands true and substantiates the same relationship.

Another set of 164 firms from SEC Accounting and Auditing Enforcement Releases (AAERs) and a sample of 164 non-AAER firms during the period 2004–2010 reveal that male CEOs with more masculine faces are more likely to be named as perpetrators of intentional misreporting. Then, an analysis of photos of chief financial officers (CFOs) of these AAER firms confirms that the faces of the CEOs and CFOs are linked with the possibility of being accused by name. For each CEO/CFO pair, a firm fixed effect is considered for time-controlled firm characteristics to simplify the inferences of the research. The results, however, are based on many caveats.

Abstractor’s Viewpoint

In this era of interdependence among disciplines, researchers are coming up with novel findings. The authors perform simple analysis in the field of behavioral finance that draws inferences based on human behavior. Even in a controlled environment of corporate governance and internal controls, a CEO’s style is an important factor in determining corporate performance. Further research could be conducted on the cause of the association between CEO ability and facial structure.

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.