CEO Narcissism and Negative Firm Consequences:
the Moderating Roles of CEO Gender and Boardroom Gender Diversity
Student Name S.H.M. Messink Student Number S2976153
MSc BA Track Organizational and Management Control Supervisor Dr. Y. Karaibrahimoglu
Co-assessor Dr. C.P.A. Heijes Date 29 July 2019 Word Count 12282
Abstract
2 Introduction
Firms that commit fraud often face severe consequences, due to punishment by the market. “For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3.08.” (Karpoff, Lee, & Martin, 2008, p. 581). Compared to their non-fraudulent counterparts, these firms are much more likely to be declared bankrupt or be involuntarily delisted (COSO, 2010). Studies by ACFE (2010; 2014) and COSO (2010) show that the CEO is, in most of the cases, personally involved in cases of fraud. Since organizational outcomes are shaped by the characteristics and traits of the CEO (Chatterjee & Hambrick, 2007), it is of major importance for the board to understand the CEO’s personality (Boyle, Carpenter, & Hermanson, 2012). One preeminent characteristic of the CEO’s personality that affects organizational outcomes, is CEO narcissism. Narcissistic CEOs strive to enhance the firms’ financial reporting and improve their personal results in order to achieve self-enhancement (Olsen, Dworkis, & Young, 2014). Therefore, the probability of narcissistic CEOs to engage into earnings management and manipulate the accounting choices is higher compared to others (Buchholz, Lopatta, & Maas, 2014).
Besides earnings management, accounting manipulation, and fraud, there is a growing body of literature indicating other serious problems that narcissistic CEOs can create for their organizations. CEO narcissism is found to be associated with unethical behavior, leading to organizational practices by which leaders place their organizations at greater risk (Chatterjee & Hambrick, 2011; De Hoogh, Den Hartog, & Nevicka, 2015; O’Reilly, Doerr, Caldwell, & Chatman, 2014; Olsen et al., 2014; Rijsenbit & Commandeur, 2013).
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The moderating role of CEO gender is supported by both the Social Role- and Token Theory. The Social Role Theory states that women are more ethical, transparent, and risk-averse compared to men, but are also constrained by certain gender role expectations, and are therefore less likely to exhibit narcissistic traits (Glass & Cook, 2016). Token Theory adds to this view and claims that, as a numerical minority, women have to deal with constraints that limit their abilities to promote organizational initiatives, especially those that are innovative, risky, or potentially harmful (Ingersoll, Glass, Cook, & Olsen, 2017). Narcissistic female CEOs, specifically, are therefore found to be unable to put their organizations at risk to the same extend as their male counterparts, and thus do not create equally negative consequences.
In contrast, a moderating role of boardroom gender diversity is a novel idea that yet remains an unresearched area of the CEO narcissism literature. There are some studies that try to mitigate the role of narcissistic CEOs and show that the resulting negative firm consequences can be moderated through the composition of the boardroom, but the evidence concerning a relationship between a narcissistic CEO and the board remains scarce. On the other hand, there is many evidence reporting the positive consequences of a gender-diversified boardroom. However, the step towards investigating whether the positive consequences of a gender-diversified boardroom are strong enough to moderate the negative consequences as caused by a narcissistic CEO, has not been made to this day.
Prior CEO narcissism literature has mainly focused on male CEOs, simply because most CEOs are male. Despite the evidence that narcissistic traits are displayed and perceived differently when exposed by men and women (Grijalva, Harms, Newman, Gaddis, & Fraley, 2015), very few studies have analyzed whether CEO gender can mitigate the negative firm effects as caused by a narcissistic CEO. Due to the varying manifestation of narcissism by gender, and the different social gender norms and expectations, it is of major importance to fill this gap. Furthermore, the moderating role of a gender-diversified boardroom remains an uninvestigated area, even though there is mounting evidence pointing out the organizational benefits of a diversified boardroom, and multiple researchers call for an examination of the relationship between the CEO and board members, in terms of narcissism and gender (Braun, 2017; Bugeja, Matolcsy, & Spiropoulos, 2016). Therefore, I will examine the following as my primary research question in this study:
Can the negative firm consequences as caused by a narcissistic CEO be moderated by CEO gender and boardroom gender diversity?
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Second, I integrate boardroom gender diversity, thereby adding to the literature on (internal) corporate governance, with the board of directors being an important mechanism. There has been extensive research regarding the benefits for a firm of having a gender-diversified board. However, none of these studies have sought whether the positive consequences of a gender-diversified boardroom are strong enough to moderate the negative consequences of a narcissistic CEO. Research in this area might create valuable insights into the corporate governance mechanisms that help to shape organizational outcomes.
In the following sections of this paper I will first address the underlying theories and extant literature of CEO narcissism and its relation to CEO gender and boardroom gender diversity, which lead to the establishment of my hypotheses. Next, I will expand on the research design of this study, further explaining the sample and methods used, followed by the presentation of the results of my analyses. Finally, I will end with my conclusions, in which I answer my research question and go into further detail on the implications that can be derived from these conclusions, the limitations of my study, and my recommendations for further research.
Literature Review and Hypotheses Development Narcissism
Narcissism is a personality trait that indicates the extent to which an individual shows signs of overconfidence, self-admiration, a lack of empathy, manipulation for personal gain, and hostility (Brummelman, Thomaes, & Sedikides, 2015; Campbell, Hoffman, Campbell, & Marchisio, 2011; Grijalva et al., 2015; Rosenthal & Pittinsky, 2006). Researchers distinguish between two streams of narcissism, vulnerable narcissism and grandiose narcissism (Miller & Campbell, 2008; Miller et al., 2011; Miller, Lynam, Hyatt, & Campbell, 2017; Rose, 2002; Wink, 1991).
Vulnerable narcissism causes anxiety, low self-esteem and a fragile self-concept (Ackerman, Hands, Donnellan, Hopwood, & Witt 2017; Rohmann, Neumann, Herner, & Bierhoff, 2012). Due to a more introverted nature and low self-esteem, individuals who exhibit vulnerable narcissism are highly neurotic and have defensive self-presentation tactics, leading to higher levels of distrust and aggression (Clarke, Karlov, & Neale, 2015; Hart, Adams, Burton, & Tortoriello, 2017; Miller et al., 2011).
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stream of narcissism to perform their research (O’Reilly et al., 2018; Reina, Zhang, & Peterson, 2014). As such, I will also refer to narcissism as being grandiose narcissism in this study.
CEO narcissism and negative firm consequences
Academic researchers most often view organizational outcomes as being unrelated to the people involved in the organization. The Upper Echelons Theory, on the other hand, claims that organizational outcomes are partially dependent upon the background characteristics of the organization’s top management (Hambrick & Mason, 1984). One of these managerial characteristics can refer to the level of narcissism that the organization’s CEO possesses, thereby signaling that there is a correlation between the narcissistic personality of the CEO, and the organizational performance of the firm.
This link can also be found in the existing CEO narcissism literature, from which the majority draws on the negative consequences for firms1. Mainly due to the CEO’s lack of concern for others, and their
engagement in unethical behaviors, narcissistic CEOs place their companies at greater risk for crisis, scandal, or fraud (Chatterjee & Hambrick, 2011; De Hoogh et al., 2015; O’Reilly et al., 2014; Olsen et al., 2014; Rijsenbilt & Commandeur, 2013). Narcissists seem to be fueled by intensified perceptions of benefits that arise from risky behaviors, thereby suggesting that they act out of a surplus of eagerness rather than a deficit of restrictions (Foster, Shenesey, & Goff, 2009). Prior research in the field of CEO narcissism has examined the consequences for organizations of having a narcissistic CEO, and found that those organizations experience considerable downsides, showing evidence of increased risk-taking, manipulation of accounting data, and even fraud (Ingersoll et al., 2017; O’Reilly et al., 2018). CEO narcissism is often associated with overinvestment in research & development (R&D), new technologies (Gerstner, Konig, Anders, & Hambrick, 2015), and internationalization (Oesterle, Elosge, & Elosge, 2016), and redundant merger & acquisition (M&A) expenditures (Aktas, de Bodt, Bollaerdt, & Roll, 2016). Also, is CEO narcissism often linked to excessive compensation and higher levels of corporate tax avoidance (O’Reilly et al., 2018), and do firms with a narcissistic CEO have lower financial productivity, thereby facing lower profitability and operating cash flows (Ham, Seybert, & Wang, 2018). Furthermore, do narcissistic CEOs hinder fruitful collaboration in teams (Nevicka et al., 2011) and do they try to enhance the short-term, external image of the firm by engaging in unsustainable “window dressing”, thereby putting the reputation of the organization at stake (Petrenko, Aime, Ridge, & Hill, 2016).
Thus, since CEOs are able to individually influence firm outcomes with their personality characteristics, and there is mounting evidence from prior researchers pointing out the negative effects stemming from
1 Other CEO narcissism literature also shows positive outcomes from having a narcissistic CEO. Depending upon
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the actions of narcissistic CEOs, I also expect that CEO narcissism is positively related to negative firm consequences. Therefore, based on the measurements as also used by prior researchers in the field of CEO narcissism (Chatterjee & Hambrick, 2011; Ingersoll et al., 2017; Olsen et al., 2014), risk-taking and questionable behavior, I establish the following hypotheses.
Hypothesis 1a. There is a positive relationship between CEO narcissism and risk-taking.
Hypothesis 1b. There is a positive relationship between CEO narcissism and questionable
behavior.
The moderating role of CEO gender
There are prescribed differences in leadership between men and women (Ingersoll et al., 2017). The manifestation of narcissism is found to vary by gender due to existing social gender norms and divergent treatment between men and women (Jørstad, 1996), causing narcissistic behaviors that are displayed by women to be perceived differently than when those behaviors are displayed by men (Grijalva et al., 2015).
The Social Role Theory states that female CEOs are less likely to exhibit narcissistic traits, due to women being more ethical, transparent, and risk-averse than men. Women face certain gender role expectations that limit them to display typical leadership qualities such as dominance, competitiveness, and assertiveness, thereby constraining their path to top leadership (Glass & Cook, 2016). These qualities are often rewarded and promoted when exhibited by men, but women, on the other hand, are penalized for these qualities since they are seen as violations of appropriate norms of femininity (Ingersoll et al., 2017).
Token theory add to this view and suggests that numerical minorities, tokens, enjoy lower status, prestige, and influence compared to the members of the numerical majority, leading to heightened visibility, exaggerated stereotypes, limited access to critical resources, performance pressures, and negative evaluation bias (Acker, 2006; Eagly & Karau, 2002; Ingersoll et al., 2017; Kanter, 1977; Ryan et al., 2016). When the numerical minority is comprised of a group with lower social status as compared to the majority, such pressures are aggravated (Chambliss & Uggen, 2000; Yoder, 1991). Due to their token status, women will face constraints that may limit their ability to drive organizational initiatives, and in particular those that are risky, novel, or potentially harmful to the organization (Glass & Cook, 2016; Ingersoll et al., 2017).
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Cook, 2016). Some even claim that they are vital for firms seeking to limit corruption, risk, and scandal (Prügl, 2012; Roberts & Soederberg, 2012; Roberts, 2001). Empirical research regarding women’s personality characteristics shows that women, as compared to men, have a greater ethical propensity (Albaum & Peterson, 2006; Betz, O’Connell, & Shepard, 1989), are more risk-averse, and focus more on the long term (Watson & McNaughton, 2007). Some calls for the advancement of women to leadership roles even position women as superior leaders in terms of collaboration, emotional intelligence and ethical leadership (Sherwin, 2014). Narcissistic female CEOs, as compared to their male counterparts, are found to be unable to place their organizations at risk to the same degree as their male counterparts (Ingersoll et al., 2017), indicating that narcissistic female CEOs do not create equally negative consequences. Therefore, I expect that narcissistic female CEOs are less risk-taking and engage in less questionable behavior, as compared to narcissistic male CEOs, and I establish the following hypotheses.
Hypothesis 2a. CEO gender weakens the relationship between CEO narcissism and negative
firm consequences.
Hypothesis 2b. CEO gender weakens the relationship between CEO narcissism and negative
firm consequences.
The moderating role of boardroom gender diversity
A useful framework to address the relationship between the CEO and the board is the agency theory. An agency problem exists when an agent has established goals that conflict with those of the principal (Boyd, 1994). The agent here is the CEO, a narcissistic CEO specifically, who strives to enhance his or her own best self-interest. The principal, on the other hand, is the board, which serves as the representative of the shareholders (Fama & Jensen, 1983; Zald, 1969). Since there is often a clear distinction between the CEO’s goals that improve his or her own personal benefit and the organizational goals that are pursued by the shareholders, an agency problem exists. It is then up to the board, as the primary internal control mechanism, to better align the different interests of shareholders and top management (Mizruchi, 1983; Walsh & Seward, 1990). Narcissistic CEOs, however, often ignore the advice given by directors to demonstrate their superiority, but do, on the other hand, have stronger ties to board members who show similar levels of narcissism, or have prior experience with similarly narcissistic CEOs (Zhu & Chen, 2014).
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compensation committee can successfully moderate the excessive pay of narcissistic CEOs (Bugeja et al., 2016). Also, can product-harm crises, as caused by a narcissistic and self-interested CEO, be moderated by the power of the marketing department within the top management team (Kashmiri, Nicol, & Arora, 2017). This signals that the composition of the top management team or the boardroom can moderate the relationship between CEO narcissism and negative firm consequences. However, there is no reported evidence specifically on whether boardroom gender diversity is able to moderate the relationship between CEO narcissism and negative firm consequences.
Recent evidence, however, is documenting positive consequences arising from board gender-diversity. For example, firms with gender-diverse boards have better stock price informativeness (Gul, Srinidhi, & Ng, 2011), higher earnings quality (Srinidhi, Gul, & Tsui, 2011), make better M&A decisions (Levi, Li, & Zhang, 2014) and have greater corporate social performance or responsibility (Bear, Rahman, & Post, 2010; Boulouta, 2013; Zhang, Zhu, & Ding, 2013). These benefits can possibly be explained by the different group dynamics that a diverse team brings, since the integration of women within leadership ranks can reduce salience of gender stereotypes, limit token pressures and enable women to successfully promote organizational change (Ely, 1995; Ely & Thomas, 2001). Furthermore, Konrad, Kramer, and Erkut (2008) have found that women ask tougher questions. They found multiple situations in which female directors are alone in questioning the CEO’s compensation or in voting against compensation issues. This shows that female directors raise questions that male directors are unwilling to ask, thereby altering the group dynamics and the relationship with the CEO. This might be explained by the fact that female directors are more secure in their position because they had to work harder to attain their board seat as compared to men (Eagly & Carli, 2003). Also, stakeholders and regulators might urge the firm to keep female directors within their board, causing them not to feel indebted to the CEO and be more comfortable with confronting the CEO (Bugeja et al., 2016). Because these women do not feel pressured, they are more likely to act in the serve the organizational goals of the shareholders, without being blinded by the CEO’s individual vision. Since both the characteristics and diversity of individual group members’ abilities and resources are important in understanding group performance, diversity improves board effectiveness (Li & Wahid, 2018). Thus, as women take different positions in boardrooms as compared to men, this diversity might yield the necessary benefits that are needed in order to control the decisions of narcissistic CEO. Therefore, I establish the following hypotheses.
Hypothesis 3a. Boardroom gender diversity weakens the relationship between CEO narcissism
and risk-taking.
Hypothesis 3b. Boardroom gender diversity weakens the relationship between CEO narcissism
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Research Design Sample
The sample is based on archival data on the top executives of all S&P 500 companies between the years 1992 and 2017, extracted from the ExecuComp database which is available through Wharton Research Data Services (WRDS), resulting in an initial sample of 3739 firm-year observations. This sample excludes all financial firms, as these are more commonly researched separately from other industries due to significant differences in the composition and nature of their balance sheets and income statements (Ingersoll et al., 2017). Further data on the boards and board members is extracted from the BoardEx database, and further company data from the CompuStat database, both accessible through WRDS as well. The firms’ financial leverage information is gathered through the WRDS Financial Ratio Suite.
Observations with missing values for one of the variables or for data required to calculate a variable, were removed from the sample. This results in the final sample of 822 U.S. based firm-year observations, with a rather small share of 68 observations coming from the ten female CEOs in the sample, and the remaining 754 observations coming from the 126 male CEOs in the sample. Compared to the samples of Chatterjee and Hambrick (2007), and Olsen et al. (2014), which contained 352 and 1118 firm-year observations respectively, the sample size is representative for this stream of research.
Methodology and measures
10 Figure I. Conceptual model.
To test hypothesis 1, I will use the following research model. 𝑁𝑒𝑔_𝐹𝑖𝑟𝑚_𝐶𝑜𝑛𝑠𝑖
= 𝛽0 + 𝛽1 𝐶𝐸𝑂_𝑁𝑎𝑟𝑐𝑖 + 𝛽2 𝐶𝐸𝑂_𝐴𝑔𝑒𝑖+ 𝛽3 𝐵𝑟𝑑_𝑆𝑖𝑧𝑒𝑖
+ 𝛽4 𝐷𝑖𝑟_𝑇𝑒𝑛𝑢𝑟𝑒𝑖 + 𝛽5 𝐹𝑖𝑟𝑚_𝑆𝑖𝑧𝑒𝑖 + 𝛽6 𝑅𝑂𝐴𝑖 + 𝛽7 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖 + (𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑎𝑛𝑑 𝑌𝑒𝑎𝑟 𝐹𝐸) + 𝜀𝑖
(1)
Here, Neg_Firm_Cons refers to the negative firm consequences. I will measure the negative firm consequences through two dependent variables: (1) risk-taking (Risk_Taking) and (2) questionable behavior (Q_Behavior). As these variables have also been used in prior research regarding CEO narcissism (Chatterjee & Hambrick, 2011; Ingersoll et al., 2017; Olsen et al., 2014; Roychowdhury, 2006), the use of these established measures allows for a benchmark to compare the findings with existing literature.
Risk-taking is measured as the natural logarithm of the total sum of expenditures in acquisitions, research and development, and capital expenditures, thereby capturing the three main components of risk-taking spending as validated by earlier researchers (Beckman & Haunschild, 2002; Chatterjee & Hambrick, 2007; Zhu & Chen, 2014).
The modelling of questionable behavior is based on the composed measurement of Cohen and Zarowin (2010) and Zang (2006), who tried to capture the total effects of real earnings management by combining two abnormal accounting practices: abnormal cash flow and operations (CFO), and abnormal discretionary expenditures (DISX). First, the normal levels of the accounting practices are generated using the estimated coefficients from a cross-sectional regression for each year and industry (2-digit SIC
CEO Narcissism Negative Firm
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codes) for both CFO and DISX2. In these equations, CFO refers to the cash flow from operations in
period t, and DISX refers to the discretionary expenditures in period t, defined as the sum of advertising expenses, R&D expenses, and selling, general, and administrative expenses. By subtracting the generated normal level of the accounting practices from the actual level, the abnormal level is determined. In order to create one variable for questionable behavior, the two measurements are merged through a summation of their standardized values.
The variable of interest in Model 1 is CEO_Narc. The level of narcissism amongst CEOs is measured using the method as described by Chatterjee and Hambrick (2007), based on four different characteristics: (1) the prominence of the CEO’s photograph in the company’s annual report; (2) the CEO’s prominence in the company’s press releases; (3) the CEO’s use of first-person singular pronouns in interviews; and (4) the CEO’s relative cash and non-cash compensation. In order to calculate the narcissism score for a CEO, a CEO must have at least four years of tenure within the same firm, and the firm must have publicly available financial data. The first year of CEO tenure is excluded from the calculation due to abnormalities that may show through CEO succession. Since narcissism is a stable and constant construct of personality (Chatterjee and Hambrick 2007; Ingersoll et al., 2017; Olsen et al. 2014), the narcissism score is based on the average values of years two and three of CEO tenure for the different components.
Also, I include the following control variables in the model. First, executive age, CEO_Age. Age can cause a variation in the CEOs tendency to engage in risky initiatives and grandiose behavior (Chatterjee & Hambrick, 2007). Secondly, I control for board size, Brd_Size, measured as the total number of board members, since larger boards are expected to be less effective in terms of monitoring (Jensen, 1993; Yermack, 1996), and larger boards are often associated with higher levels of fraudulent financial reporting (Zhu & Chen, 2014). Next, the tenure of the directors, Dir_Tenure, measured as the average tenure of the board members, as this might affect firm strategy and performance (Tang, Crossan, & Rowe, 2011). Fourth, Firm_Size, referring to the size of the firm, as determined by the total number of employees of the firm. Controlling for the size of the firm is important since larger firms have higher levels of visibility, and have a higher accountability to both shareholders and stakeholders (Arthur & Cook, 2009). Fifth, I control for firm performance as determined by return on assets (ROA), ROA. Strong firm performance may enable the firm to provide higher levels of resources and more discretion for decision making, which could affect the actions of the CEO (Cook & Glass, 2011). The final control
2 The normal level of CFO is calculated according to model 3 of Cohen and Zarowin (2010), who express CFO as
a linear function of sales and change in sales: 𝐶𝐹𝑂𝑖𝑡 𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡−1= 𝑘1 1 𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡−1+ 𝑘2 𝑆𝑎𝑙𝑒𝑠𝑖𝑡 𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡−1+ 𝑘3 ∆𝑆𝑎𝑙𝑒𝑠𝑖𝑡 𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡−1+ 𝜀𝑖𝑡 The normal level of DISX is calculated according to model 7 of Cohen and Zarowin (2010), who express DISX as a linear function of sales: 𝐷𝐼𝑆𝑋𝑖𝑡
𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡−1= 𝑘1 1
𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡−1+ 𝑘2
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variable is Leverage, referring to the firm’s financial leverage, measured as a firm’s debt to equity ratio. It is important to control for financial leverage as it may be indicative of risky behaviors (Ingersoll et al., 2017). Furthermore, I control for year and industry effects.
Similarly, to test hypothesis 2, I will use the following research model. 𝑁𝑒𝑔_𝐹𝑖𝑟𝑚_𝐶𝑜𝑛𝑠𝑖 = 𝛽0 + 𝛽1 𝐶𝐸𝑂_𝑁𝑎𝑟𝑐𝑖 + 𝛽2 𝐶𝐸𝑂_𝐺𝑒𝑛𝑑𝑒𝑟𝑖 + 𝛽3 𝐶𝐸𝑂_𝑁𝑎𝑟𝑐𝑖 𝑥 𝐶𝐸𝑂_𝐺𝑒𝑛𝑑𝑒𝑟𝑖 + 𝛽4 𝐶𝐸𝑂_𝐴𝑔𝑒𝑖 + 𝛽5 𝐵𝑟𝑑_𝑆𝑖𝑧𝑒𝑖 + 𝛽6 𝐷𝑖𝑟_𝑇𝑒𝑛𝑢𝑟𝑒𝑖 + 𝛽7 𝐹𝑖𝑟𝑚_𝑆𝑖𝑧𝑒𝑖 + 𝛽8 𝑅𝑂𝐴𝑖 + 𝛽9 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖 + (𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑎𝑛𝑑 𝑌𝑒𝑎𝑟 𝐹𝐸) + 𝜀𝑖 (2)
Here, CEO_Gender refers to the sex of the CEO. In the dataset, a binary variable is included where female CEOs are assigned the value of 1, and male CEOs the value of 0.
In model 2, the variable of interest is CEO_Narc x CEO_Gender. A significant value for this variable indicates that CEO gender successfully moderates the relationship between CEO narcissism and the negative firm consequences. Since women are assigned the value of 1, a significant negative coefficient indicates the weakening of the relationship, meaning that narcissistic female CEOs cause less negative firm consequences, and thus are less risk taking, and/or engage in less questionable behavior, and vice versa.
Finally, to test hypothesis 3, I will use the following research model. 𝑁𝑒𝑔_𝐹𝑖𝑟𝑚_𝐶𝑜𝑛𝑠𝑖 = 𝛽0 + 𝛽1 𝐶𝐸𝑂_𝑁𝑎𝑟𝑐𝑖 + 𝛽2 𝐵𝑟𝑑_𝐺𝑒𝑛_𝐷𝑖𝑣𝑒𝑟𝑠𝑖 + 𝛽3 𝐶𝐸𝑂_𝑁𝑎𝑟𝑐𝑖 𝑥 𝐵𝑟𝑑_𝐺𝑒𝑛_𝐷𝑖𝑣𝑒𝑟𝑠𝑖 + 𝛽4 𝐶𝐸𝑂_𝐴𝑔𝑒𝑖 + 𝛽5 𝐵𝑟𝑑_𝑆𝑖𝑧𝑒𝑖 + 𝛽6 𝐷𝑖𝑟_𝑇𝑒𝑛𝑢𝑟𝑒𝑖 + 𝛽7 𝐹𝑖𝑟𝑚_𝑆𝑖𝑧𝑒𝑖 + 𝛽8 𝑅𝑂𝐴𝑖 + 𝛽9 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖 + (𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑎𝑛𝑑 𝑌𝑒𝑎𝑟 𝐹𝐸) + 𝜀𝑖 (3)
Here, Brd_Gen_Divers refers to boardroom gender diversity, which will be measured in this study according to a diversity measurement that is often used in gender diversity literature: the Blau index (Abad, Lucas-Pérez, Mínguez-Vera, & Yagüe, 2017; Campbell & Mínguez-Vera, 2008; Gordini & Rancati, 2017; Reguera-Alvarado, de Fuentes, & Laffarga, 2017)3. If male and female members are
equally represented within the board of directors, diversity is maximized and the board is completely heterogeneous. At this point, the index will reach the maximum value of 0.5, whereas the value will be equal to zero if there is a complete homogeneous board (Blau, 1977). For the purpose of descriptives, I
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also add the variable Female_Ratio, which refers to the ratio of female directors within the board. However, this variable is not included in the models for hypotheses testing, since the focus lies on the effect of boardroom gender diversity rather than the effect of a homogeneous female boardroom. In Model 3, the variable of interest is CEO_Narc x Brd_Gen_Divers. A significant value for this variable indicates that boardroom gender diversity successfully moderates the relationship between CEO narcissism and the negative firm consequences. Here, a negative coefficient implies a weakening of the relationship, meaning that firms with a gender-diversified boardroom experience less negative firm consequences as caused by having a narcissistic CEO, compared to firms without a gender-diversified boardroom.
Analyses
This study uses a multivariate empirical model based on a panel regression analysis. The analysis is conducted in Stata, and the moderation is entered into the equation as an interaction term. For the means of descriptive statistics, I conduct a two-sample Wilcoxon rank-sum (Mann-Whitney) test in order to compare the median values of the variables by gender4. To test the first hypotheses, which predicts a
positive relationship between CEO narcissism and negative firm consequences, I regress both risk-taking and questionable behavior on CEO narcissism. To test the second hypotheses, which predicts that CEO gender weakens the relationship between CEO narcissism and negative firm consequences, I add the interaction term between CEO narcissism and CEO gender to the regression. The same method is applied for the third hypotheses, which predicts that boardroom gender diversity weakens the relationship between CEO narcissism and negative firm consequences, and the interaction term between CEO narcissism and boardroom gender diversity is included in the model. In all models, all the control variables are included.
Results Descriptive statistics
Table I presents the descriptive statistics for each of the variables in this study, reporting the median, mean, standard deviation, minimum, and maximum for all firm-year observations in the sample. Furthermore, the median and mean are reported separately for the male and female samples, together with the results of a two-sample Wilcoxon-Mann-Whitney test for the difference in medians.
4 A Shapiro-Wilk test for normal data results in a significance level below 5% for each variable, thereby
14 Table I. Descriptive statistics.
Full Sample (N=822)
Median Mean SD Minimum Maximum
CEO_Narc -0.036 -0.007 0.565 -2.010 1.761 CEO_Gender 0 0.083 0.276 0 1 Risk_Taking 6.768 6.992 1.348 3.111 10.864 Q_Behavior -0.145 5.08 e-18 0.693 -2.062 8.274 Brd_Gen_Divers 0.298 0.288 0.113 0 0.5 Female_Ratio 0.182 0.188 0.095 0 0.5 CEO_Age 56 55.339 5.674 39 70 Brd_Size 11 11.016 2.011 6 19 Dir_Tenure 8.203 8.220 2.873 0.2 19.867 Firm_Size (x1000) 42 105.239 232.780 0.841 2100 ROA 0.175 0.184 0.079 -0.118 0.488 Leverage 1.391 2.309 3.230 0.08 30.576
Female sample (N=68) Male sample (N=754) Difference in medians
Median Mean Median Mean Z P > Z
CEO_Narc 0.018 0.078 -0.048 -0.015 0.404 0.686 Risk_Taking 7.332 7.337 6.724 6.961 2.811 0.005 Q_Behavior 0.158 -0.026 -0.148 -0.014 3.183 0.002 Brd_Gen_Divers 0.42 0.410 0.290 0.277 9.938 0.000 Female_Ratio 0.3 0.301 0.176 0.178 9.938 0.000 CEO_Age 56 56.206 56 55.261 1.150 0.250 Brd_Size 12 11.529 11 10.970 2.209 0.027 Dir_Tenure 7.863 7.852 8.25 8.253 -1.104 0.270 Firm_Size (x1000) 131 143.790 39.529 101.762 5.803 0.000 ROA 0.169 0.187 0.177 0.184 -0.813 0.416 Leverage 1.821 3.647 1.359 2.188 4.199 0.000
Note: All numbers are rounded to three decimals.
The median values for the full sample of 0.298 and 0.182 for boardroom gender diversity and women ratio, respectively, show that women are clearly the underrepresented gender in the boardroom, with only 18.2 percent of the directors being female. The same is found among the CEOs in the sample, where the mean value of CEO gender is 0.083, indicating that only 8.3% of the CEOs are female. Thus, it is obvious that the male gender is still dominant within the higher organizational ranks, which is a conclusion that is also drawn by other researchers in the area of gender diversity (Bugeja et al., 2016; Isidro & Sobral, 2015; Miller & Del Carmen Triana, 2009; Rose, 2007). What is notable, is that there is a significant difference in boardroom gender diversity and female ratio under male and female CEOs. Whereas in firms with male CEOs women only make up 17.6 percent of the directors, this is 30 percent under female leadership. Thus, female CEOs might appoint more women to the boardrooms, but it may also be that female directors feel more comfortable supporting a female CEO and are less constricted to join the board.
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studies on CEO narcissism by Chatterjee and Hambrick (2011) and Ingersoll et al. (2017), who report mean scores on CEO narcissism of 0.03 and 0.01, respectively.
The average boardroom in the sample comprises of 11 directors, who have an average tenure of 8.2 years. These findings are in line with a board size of ten directors found by Thams, Bendell, and Terjesen (2018), and a director tenure found by Tang et al. (2011) of 7.43 years. In firms with female CEOs, the boards seem to be larger than under male CEOs, with a median of 12 members compared to 11, respectively.
As compared to Ingersoll et al. (2017) who report an average firm size of approximately 29 thousand employees, the average firm in the sample is quite large with a median of 42 thousand employees. However, since the S&P 500 only includes firms that are in the large-cap segment of the market (S&P Dow Jones Indices, 2019), it is biased towards large firms and these results seem quite logical. The significant difference in firm size indicates that, on average, female CEOs oversee larger firms than male CEOs. This might be explained by the higher accountability and responsibility of larger firms towards their stakeholders, who might pressure those firms to appoint a woman as CEO.
In terms of performance, the firms in the sample are doing very well. With a median ROA of 17.5 percent, the companies are very effective in utilizing their assets by generating relatively high levels of earnings, especially when comparing it to ROA percentage found in other studies of five (Ingersoll et al., 2017; Petrenko et al., 2016) and six percent (Olsen et al., 2014). With a median debt-to-equity ratio of 1.391 as compared to ratios of 1.68 (Olsen et al., 2014) and 1.78 (Ingersoll et al., 2017), the companies in the sample retain lower levels of financial leverage. However, this low level of debt-to-equity is mostly due to the male CEOs in the sample, who have a median of 1.359. The female CEOs show a significantly higher ratio of 1.821. Due to the tax shield that leverage creates, holding debt is profitable up to a certain height. Research shows that the optimal debt-to-equity ratio at which firms can benefit most from the interest tax shield, lies around 1.75 (Winn, 2014), which is close to the leverage level of the female sample. This indicates that male CEOs retain lower levels of debt, and thus do not fully benefit from the interest tax shield of leverage.
16 Table II. Correlation matrix.
1 2 3 4 5 6 7 8 9 10 1 CEO_Narc 2 CEO_Gender 0.045 3 Risk_Taking -0.027 0.077 4 Q_Behavior 0.036 0.068 0.215 5 Brd_Gen_Divers 0.104 0.323 0.118 0.083 6 CEO_Age 0.181 0.046 0.142 0.065 0.039 7 Brd_Size 0.041 0.077 0.350 0.143 0.218 0.145 8 Dir_Tenure 0.013 -0.039 -0.041 -0.016 -0.095 0.044 0.063 9 Firm_Size 0.023 0.050 0.304 0.309 0.045 0.042 0.282 -0.021 10 ROA 0.220 0.011 -0.013 -0.008 0.079 0.044 -0.001 0.101 0.003 11 Leverage 0.028 0.125 0.012 -0.063 0.111 0.017 0.135 -0.061 0.028 -0.068 Note: The correlations in bold are significant at five percent.
Table II displays the correlation matrix for the all the variables included in the models. The highest correlations can be found between CEO gender and boardroom gender diversity (0.323), board size and risk-taking (0.350), and firm size and both risk-taking and questionable behavior (0.304 and 0.309, respectively). VIF analysis on the regressions confirm that there are no multicollinearity issues that must be considered.
Findings
Table III presents the results of the regression of both measures of negative firm consequences on CEO narcissism, with the latter being the variable of interest in the first model. These regressions are testing hypotheses 1 which predicts a positive relationship between CEO narcissism and negative firm consequences, and thus a positive coefficient is expected for CEO narcissism.
Hypothesis 1a predicts the relationship to risk-taking. The regression gives a positive coefficient of 0.066, which is significant at the five percent level. This means that hypothesis 1a is supported, and CEO narcissism is positively related to risk-taking. Furthermore, are board size and director tenure both positively related to risk-taking with coefficients of 0.083 and 0.075, respectively, which are both significant at the one percent level. This is in line with the earlier mentioned arguments about board size, where larger boards are associated with higher levels of accounting manipulation (Zhu & Chen, 2014), and are weaker in terms of monitoring (Jensen, 1993; Yermack, 1996). The same is found for director tenure, since director with longer tenures are more resistant to change (Anderson, Mansi, & Reeb, 2004; Janis, 1982; Stevens, Beyer, & Trice, 1978). Ineffective monitoring of the board decreases the effect of corporate governance, and is found to be negatively related to firm risk (Brick & Chidambaran, 2008).
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at five percent. This indicates that CEOs tend to engage in more questionable behavior as they get older, which is also found by Chatterjee and Hambrick (2007). Also, is firm size strongly and positively related to questionable behavior at the one percent level, with a coefficient of 0.148, indicating that larger firms more often engage in questionable behavior. This is contrary to what one would expect, since large firms have a higher visibility and are more pressured by share- and stakeholders (Arthur & Cook, 2009), and thus engaging in questionable behavior could be disastrous for their reputation.
Table III. Regression results for model 1.
Neg_Firm_Cons Risk_Taking Q_Behavior5 CEO_Narc 0.066** (0.029) 0.156*** (0.045) CEO_Age -0.032 (0.025) 0.082** (0.037) Brd_Size 0.083*** (0.026) 0.008 (0.038) Dir_Tenure 0.075*** (0.023) -0.006 (0.034) Firm_size 0.050 (0.031) 0.148*** (0.047) ROA -0.010 (0.026) -0.051 (0.039) Leverage -0.031 (0.023) -0.013 (0.034) Constant 0.972 (0.871) -0.220 (0.590)
Year Dummy Yes Yes
Industry Dummy Yes No
R2 0.872 0.725
Adjusted R2 0.850 0.676
Wald chi2 206.93***
F 2.31***
Notes: standardized coefficients. Standard errors in parentheses below estimates. *** p < 0.01, ** p < 0.05, * p < 0.1
In table IV, the regression results for model 2 are presented. Here, the interaction term between CEO narcissism and CEO gender is added to the regression. I hypothesize that CEO gender weakens the relationship between CEO narcissism and negative firm consequences, and thus expect a negative coefficient.
Hypothesis 2a predicts the relationship towards risk-taking. Although the coefficient for the interaction term of -0.064 is negative, it is not significant. Therefore, is hypothesis 2a not confirmed, and a moderating effect of CEO gender cannot be established on the relationship between CEO narcissism
5 The chi2 value of 78.12 (0.000), as estimated by the Hausman test, indicates that a random-effect model is not
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and risk-taking. This means that narcissistic female CEOs are not less risk-taking as compared to narcissistic male CEOs. The same is found for CEO gender, which has a coefficient of -0.228 that is not significant. Thus, female CEOs are also not less risk-taking than their male counterparts. On the other hand, there is a statistically significant relationship between CEO narcissism and risk-taking, which was already confirmed by hypothesis 1a. Also similar to the findings regarding hypothesis 1a, are the positive links of board size and director tenure to risk-taking.
Table IV. Regression results for model 2.
Neg_Firm_Cons Risk_Taking Q_Behavior CEO_Narc 0.055* (0.030) 0.070* (0.038) CEO_Gender -0.228 (0.140) -0.500*** (0.161) CEO_Narc x CEO_Gender -0.064 (0.191) -0.445** (0.190) CEO_Age -0.032 (0.025) 0.069** (0.035) Brd_Size 0.083*** (0.026) 0.012 (0.035) Dir_Tenure 0.076*** (0.023) -0.012 (0.032) Firm_Size 0.049 (0.031) 0.335*** (0.040) ROA -0.009 (0.026) -0.040 (0.035) Leverage -0.031 (0.023) -0.031 (0.031) Constant 0.980 (0.877) -0.812 (0.796)
Year Dummy Yes Yes
Industry Dummy Yes Yes
R2 0.873 0.750
Adjusted R2 0.850 0.706
Wald chi2 209.27*** 191.73***
Notes: standardized coefficients. Standard errors in parentheses below estimates. *** p < 0.01, ** p < 0.05, * p < 0.1
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size are also here, in line with hypothesis 1b, positively and significantly related to questionable behavior, as well as CEO narcissism.
Finally, the regression results of model 3 are presented in table V. Here, the interaction term between CEO narcissism and boardroom gender diversity is added to the regression. Hypotheses 3 is tested, which predicts that boardroom gender diversity negatively moderates the relationship between CEO narcissism and negative firm consequences. The interaction term is the variable of interest.
Table V. Regression results for model 3.
Neg_Firm_Cons Risk_Taking Q_Behavior6 CEO_Narc 0.051* (0.030) 0.155*** (0.046) Brd_Gen_Divers -0.049** (0.024) -0.048 (0.035) CEO_Narc x Brd_Gen_Divers -0.037* (0.021) 0.032 (0.031) CEO_Age -0.027 (0.025) 0.080** (0.037) Brd_Size 0.078*** (0.026) 0.000 (0.039) Dir_Tenure 0.070*** (0.023) -0.008 (0.034) Firm_Size 0.046 (0.031) 0.145*** (0.047) ROA -0.005 (0.026) -0.041 (0.039) Leverage -0.036 (0.023) -0.013 (0.034) Constant 1.003 (0.879) -0.202 (0.590)
Year Dummy Yes Yes
Industry Dummy Yes No
R2 0.874 0.726
Adjusted R2 0.851 0.677
Wald chi2 214.82***
F 2.25***
Notes: standardized coefficients. Standard errors in parentheses below estimates. *** p < 0.01, ** p < 0.05, * p < 0.1
Hypothesis 3a predicts the moderating effect on risk-taking. With a coefficient of -0.037, the interaction term is significant at the ten percent level, thereby supporting hypothesis 3a. This means that boardroom gender diversity successfully and negatively moderates the relationship between CEO narcissism, indicating that narcissistic CEOs are less risk-taking in firms with a gender-diversified boardroom, than
6 The chi2 value of 84.30 (0.000), as estimated by the Hausman test, indicates that a random-effect model is not
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narcissistic CEOs in firms without a gender-diversified boardroom. In correspondence with hypotheses 1a and 2a, CEO narcissism, board size, and director tenure are positively and significantly linked to risk-taking. Furthermore, is boardroom gender diversity negatively related to risk-taking, with a coefficient of -0.049 that is significant at the five percent level. This means that in firms with a higher level of gender diversity in the boardroom, there are less signs of risk-taking.
Hypothesis 3b predicts the moderating effect on questionable behavior. However, the interaction term between CEO narcissism and boardroom gender diversity has a coefficient of 0.032. Not only is this coefficient positive rather than negative, it is also not significant. Therefore, hypothesis 3b is not supported. Whereas the direction of the coefficient is opposite to what I expected, this result is not unexplainable. Cohen and Zarowin (2010) find evidence of real earnings management, which is a proxy of the questionable behavior measurement, at the time of a seasoned equity offering (SEO). However, in the subsequent years after the SEO, the direction is opposite to that of the SEO-year, and not necessarily significant. The authors state that the abnormal behavior in the first year is followed by a predictable reversal occurring over at least two to three years after the event, suggesting that management may act in anticipation of and in response to the SEO, so that abnormal behavior is minimized over the long term. Although the context of a SEO differs from the appointment of a narcissistic CEO, the same argumentation can be applied here, where management might take preventative measures in order to minimize the expected negative consequences of a narcissistic CEO. Also here, in correspondence with hypothesis 1b and 2b, are CEO narcissism, CEO age, and firm size positively and significantly related to questionable behavior. However, as opposed to what I found regarding the level of boardroom gender diversity for hypothesis 3a, there is no significant relationship between boardroom gender diversity and questionable behavior.
Additional analyses
21 Table VI. Additional Analyses.
Neg_Firm_Cons8
Female CEOs (N=66) Narcissistic Female CEOs (N=36)
Risk_Taking Q_Behavior Risk_Taking Q_Behavior
CEO_Narc -0.129 (0.183) -0.198 (0.335) -1.060*** (0.334) 1.601** (0.629) CEO_Age 0.929** (0.434) -0.311 (0.793) -1.270 (0.818) 4.380** (1.542) Brd_Size -0.122* (0.063) 0.131 (0.116) -0.289*** (0.077) 0.134 (0.146) Dir_Tenure -0.115 (0.099) -0.786*** (0.181) -0.025 (0.133) 0.159 (0.251) Firm_Size 1.183*** (0.283) 1.085** (0.518) 0.169 (0.641) 0.736 (1.208) ROA 0.005 (0.084) -0.511*** (0.153) 0.170 (0.123) -0.438* (0.232) Leverage -0.002 (0.037) -0.066 (0.068) -0.046* (0.026) 0.011 (0.049) Constant 2.284*** (0.454) 1.179 (0.830) 0.458* (0.236) 1.023** (0.445)
Year Dummy Yes Yes Yes Yes
Industry Dummy Yes Yes Yes Yes
R2 0.946 0.924 0.990 0.972
Adjusted R2 0.908 0.870 0.975 0.934
F 24.85*** 17.09*** 70.39*** 25.84***
Notes: standardized coefficients. Standard errors in parentheses below estimates. *** p < 0.01, ** p < 0.05, * p < 0.1
The results for the full female sample show negative coefficients for CEO narcissism for both measures of negative firm consequences. This would indicate that female CEOs in organizations with more gender-diversified boards, do not cause negative consequences for their firms. However, these results are not significant and thus no conclusions can be drawn from this.
For the narcissistic female CEO sample, however, I do find significant results. With a coefficient of -1.060 that is significant at the one percent level, there is evidence of a negative relationship between CEO narcissism and risk-taking for narcissistic female CEOs. This means that narcissism among female CEOs in firms with more gender-diversified boards does not lead to increased risk-taking, but actually decreases risk-taking. The reversal is, however, true for questionable behavior. The coefficient of 1.601 that is significant at the five percent level, indicates a positive relationship between CEO narcissism and questionable behavior. Thus, contradicting to the findings for risk-taking, does CEO narcissism among female CEOs in more gender-diversified firms lead to increased engagement in questionable behavior.
8 The Breusch and Pagan Lagrangian multiplier test for random effects provides a chibar test statistic of
22
Conclusion and discussion
In this study, I examined the relationship between CEO narcissism and negative firm consequences, and the moderating roles of CEO gender and boardroom gender diversity within this relationship. For the measurement of negative firm consequences, I used two different proxies: risk-taking and questionable behavior. I found a positive and significant relationship between CEO narcissism and both risk-taking and questionable behavior, thereby confirming that CEO narcissism indeed leads to negative consequences for firms. The main research question of this paper, whether CEO gender and boardroom gender diversity can moderate the negative firm consequences as caused by a narcissistic CEO, cannot be conclusively answered with a yes. However, I do find evidence that CEO gender weakens the relationship between CEO narcissism and questionable behavior, whereas boardroom gender diversity weakens the relationship between CEO narcissism and risk-taking, thereby partially confirming the research question. Furthermore, I performed additional analyses regarding the influence of (narcissistic) female CEOs in firms where women are well represented on the board. These results show that narcissistic female CEOs, within firms with higher levels of boardroom gender diversity, engage in more questionable behavior, but are considerably less risk-taking as compared to the CEOs in the full sample, which were not necessarily supported by a gender-diversified board.
By confirming the relationship between CEO narcissism and negative firm consequences, I add to the extant CEO narcissism literature by providing additional empirical evidence on the relationship. Specifically, I arrive at the same conclusions as earlier researchers based on equal measurements of negative firm consequences (Chatterjee & Hambrick, 2011; Ingersoll et al., 2017; Olsen et al., 2014; Roychowdhury, 2006). Furthermore, these findings support the Upper Echelon Theory and indicate that the background characteristics of the CEO can influence organizational outcomes (Hambrick & Mason, 1984). With the findings regarding the moderating role of CEO gender, I add to the scarce empirical research that exists on the influence of leader characteristics on firm outcomes, and confirm the findings of Ingersoll et al. (2017), to my knowledge the only study so far that has investigated the moderating effect of CEO gender on negative firm consequences. Also, does this provide support for the Social Role- and Token Theory, suggesting that female CEOs are unable to put their organizations at stake to the same extent as male CEOs, and therefore engage in less questionable behavior. The moderating role of boardroom gender diversity on the relationship between CEO narcissism and negative firm consequences is a novel concept, for which no further empirical evidence is provided yet. With the findings of this study regarding the moderating role of boardroom gender diversity, I make a unique contribution to the literature on (internal) corporate governance and gender diversity by uncovering new insights into the mechanisms that influence business practices.
23
understanding about the individual personality characteristics of CEOs that shape organizational outcomes, thereby enriching the existing research and theory. This study shows that including women in the higher corporate ranks can have beneficial effects that improve firm outcomes. Managers can utilize these findings and implications for their own benefit in order to improve corporate practice. Managers from firms that are led by a CEO who is taking excessive risks, might benefit from creating a more gender-diversified boardroom in order to mitigate the risk-taking. Furthermore, firms that are involved in processes of real earnings management may be better off by appointing a female CEO, who can moderate the level of questionable behavior.
Limitations and further research
Although this study is conducted based on theoretical grounds and uses established measurements of narcissism that allow to be compared with and situated in extant literature, these measures are indirect and based on secondary data. Psychologists and other health professionals have developed more direct measures of narcissism that require interaction with individuals in an interview or survey format (Ingersoll et al., 2017), and the use of these measures based on primary data might offer different insights into the influence of CEO personality on organizational outcomes. The same accounts for the measurements of the other variables in this research, where the use of primary data might improve the interpretation of the results. Furthermore, are all firms in the sample based in the U.S., and the share of female CEOs is relatively small.
Due to the conflicting results between the two measurements of negative firm consequences in this study, future research might address these limitations in their studies to investigate whether the results depend on the selected sample and data. Furthermore, several researchers have pointed towards the presence of a critical mass of women in the boardroom, in order to stimulate board effectiveness and firm outcomes (Joecks, Pull, & Vetter, 2013; Wiley & Monllor-Tormos, 2018), whereas my focus in this study lies on diversity. Further researchers may distinguish between boardroom gender diversity and the presence of female members, and examine whether diversity should be maximized or only a critical mass of women is needed to achieve maximum effectiveness of the board.
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