Do executive facial trustworthiness have impact on IPO underpricing in the Indonesia stock exchange?

Abstract

Purpose

This study aims to investigate the impact of facial-based perceived trustworthiness on stock valuation, particularly, in the initial public offering (IPO). IPO settings provide the opportunity to investigate whether information asymmetry resulting from company newness in the market would influence the incorporation of soft information in the form of executive facial trustworthiness in stock valuation.

Design/methodology/approach

We use a recent machine learning algorithm to detect facial landmarks and then calculate a composite facial trustworthiness measure using several facial features that have previously been observed in neuroscience and psychological studies to be the most determining factor of perceived trustworthiness. We then regress the facial trustworthiness of IPO firm executives to IPO underpricing.

Findings

Utilizing machine learning algorithms, we find that the facial trustworthiness of the company executive negatively impacts the extent of IPO underpricing. This result implies that investors incorporate the facial trustworthiness of company executives into stock valuation. The IPO underpricing also shows that the cost of equity is higher when perceived trustworthiness is low. With regard to the higher information asymmetry in IPO transactions, such a negative impact implies the role of facial trustworthiness in alleviating information asymmetry.

Originality/value

This study provides evidence of the impact of top management personal characteristics on firms’ financial transactions in the Indonesian context. From the perspective of investors and other fund providers, this study shows evidence that heuristics still play an important role in financial decision-making. This is also an indication of investor reliance on soft information. Our research method also provides a new opportunity for the use of machine-learning algorithms in processing non-conventional types of data in finance research, which is still relatively rare in emerging markets like Indonesia. To the best of our knowledge, our study is the first to use personalized measures of trust generated through machine-learning algorithms in IPO settings in Indonesia.

Citation

Hendrawan, I.P.S. and Utama, C.A. (2024), "Do executive facial trustworthiness have impact on IPO underpricing in the Indonesia stock exchange?", Review of Behavioral Finance, Vol. 16 No. 6, pp. 1059-1086. https://doi.org/10.1108/RBF-12-2023-0327