Corporate risk and the humpback of CEO narcissism

The purpose of this paper is to investigate the association between CEO narcissism and corporate risk taking.

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.

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.

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.