Corporate risk and the humpback of CEO narcissism

• Published in: Review of behavioral finance Vol. 10; no. 3; pp. 252 - 273
• Main Authors: Aabo, Tom, Eriksen, Nicklas Bang
• Format: Journal Article
• Language: English
• Published: Leeds Emerald Publishing Limited 25.07.2018; Emerald Group Publishing Limited
• Subjects: Behavioral economics; Chief executive officers; Computer peripherals; Hypotheses; Literature reviews; Narcissism; Personality; Personality traits; Psychology; Regression analysis; Social networks; Software; Volatility; United States > US; Behavioural corporate finance; Corporate risk taking; LinkedIn profiles; CEO narcissism
• ISSN: 1940-5979; 1940-5987
• DOI: 10.1108/RBF-07-2017-0070

Purpose The purpose of this paper is to investigate the association between CEO narcissism and corporate risk taking. Design/methodology/approach The authors provide a novel and unobtrusive measure of CEO narcissism based on LinkedIn profiling. The authors investigate the relationship between CEO narcissism and corporate risk taking (stock return volatility) for a sample of 475 US manufacturing firms in the period 2010-2014. Findings The authors find an inverse U-shape relationship between CEO narcissism and stock return volatility. The inverse U-shape relationship (the “humpback”) is caused by the paradoxical nature of the narcissistic personality in which the self-esteem is high but at the same time fragile with a combination of self-admiration and a constant need of having this positive self-view confirmed. The results are robust to alternative specifications of CEO narcissism and corporate risk taking. The results are economically meaningful. Thus, a moderate degree of CEO narcissism – as compared to a very low or a very high level of CEO narcissism – is associated with an increase in corporate risk taking of approximately 12 percent. Originality/value Previous literature provides multiple analyses on the association between managerial overconfidence and corporate decisions. As opposed to overconfidence, narcissism is a personality trait having both cognitive and behavioral dimensions. This paper provides a novel contribution to the growing literature on the association between managerial biases/traits and corporate decision-making.