Master’s Thesis MSc BA O&MC
Empirical analysis of the impact of CEO narcissism on the relationship between political uncertainty and CSR and the role of political connections within this.
Playing politics: does CEO narcissism influence CSR initiatives?
Daan Wierenga S3539598 University of Groningen Faculty of Economics and Business
Business Administration Organizational Management & Control
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Abstract
Corporate social responsibility (CSR) is an important topic, but can differ among firms. This study uses both the stakeholder and agency theory to emphasize the role of the environment and the CEO within this decision-making. The environment is influenced by the level of political uncertainty, and therefore this study argues that political risk has a negative effect on the CSR practices of a firm. In addition, narcistic CEO’s are likely to behave differently, due to their personal needs, drawing from the upper echelons perspective. Therefore, this study hypothesizes that narcistic CEO’s are more likely to invest in CSR, even when political uncertainty is high. Besides, this study provide new insights concerning the role of a political connected board, as this study argues that it can mitigate political risks. This quantitative study uses a panel dataset of 271 observations from 86 S&P firms between 2002 and 2016. The results indicate no significant relationship between political uncertainty and CSR, but emphasizes the role of CEO narcissism. Besides, the results suggests that narcistic CEO’s tend to have a political connection. Moreover, the results found support that the company shares that a CEO owns, has a positive relationship with CSR. The upper echelons theory is extended by providing new insights regarding CEO narcissism.
Keywords: CSR, stakeholder theory, agency theory, political uncertainty, upper echelons perspective,
CEO narcissism, political connection.
Acknowledgement: Hereby I like to thank dr. Y. Karaibrahimoglu for the support and feedback
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Table of content
Abstract ... 1 I Introduction ... 3 II Literature review ... 5 CSR ... 5 Political uncertainty ... 6 CEO narcissism ... 7 Conceptual model ... 11 III Methodology ... 12 Sample ... 12 Analysis ... 15 IV Results ... 16 Correlation analysis ... 17 Regression analysis ... 19V Discussion and conclusion ... 21
Limitations and further research ... 22
Reference list ... 24
Appendix I Synonyms ... 29
Appendix II Histograms (in)dependent variables ... 30
Appendix III Regression analysis hypothesis 1 ... 31
Appendix IV Regression analysis hypothesis 2 ... 32
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I
Introduction
Nowadays corporate social responsibility (CSR) is as an important topic for firms (Emerald Insight, 2018; Crane & Matten, 2016). According to the stakeholder theory from Freeman (1984), firm decisions, such as CSR investments, impacts other groups or individuals besides the firm itself. This can eventually lead to stakeholder activism (Wood, 1991). Besides the influence of stakeholders firms are prone to risks, especially political risks. Trade and monetary policies, for example, creates a certain level of political uncertainty, in which firm performance is affected (Handley & Limão, 2015; Mueller, Tahbaz-Salehi, & Vedolin, 2017). The relationship between political uncertainty and CSR is therefore of interest, and currently lacks hard evidence. In a recent paper, Hassan et al. (2017) quantified the firms’ level of political uncertainty, by using a new measurement system. Using this measurement system, the effect of political risks concerning the CSR practices of a firm, can be examined. Besides the stakeholder theory, the agency theory can explain the variance of CSR practices among firms. The manager (agent) has different preferences than the owner (principal) of the firm (Jensen & Meckling, 1976). Therefore, decision-making regarding CSR consist of both external (the
environment) and internal (the Chief Executive Officer, CEO) drivers.
Literature regarding the external drivers is widespread, this in contrast to the internal drivers. The internal drivers tend to come from the CEO’s as they are considered to be leading figures of the firm (Kenton, 2019). Research consisting of these internal drivers are mostly based on the upper echelons perspective (Hambrick & Mason, 1984), meaning that characteristics of a CEO will influence the decision-making. Consequently, CEO’s characteristics indirectly influence firm outcomes, including CSR initiatives. CEO’s age, for example, plays a significant role regarding CSR investments (Fabrizi, Mallin, & Michelon, 2014) and impacts the financial leverage decisions of a firm (Ting, Azizan, & Kweh, 2015). The traits that can be examined are not limited, according to Hambrick & Mason (1984). Thus, new insights can be found in other CEO’s characteristics.
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Thus, narcistic CEO’s are more likely to respond differently, especially to risks. Therefore, it’s interesting to research the situation when firms face political uncertainty. Narcistic CEO’s might still invest in CSR, even when political uncertainty is high, as it’s in their personal interest. Besides, it may even have a long-term effect as other firms are likely to decrease CSR investments, giving the CEO more attention.
To further intensify the CSR practices of a firm, a narcistic CEO might choose to have a political connection within the board. Drawing from prior literature, a political connected board is more likely to receive governmental contracts (Goldman, Rocholl, & So, 2013), has less financial constraints (Chi, 2018) and has reduced government oversight (Correia, 2014). Moreover, by having a political
connection, the firm’s ability to mitigate the impact of political uncertainty increases according to Chi (2018). Therefore, a political connection might play a critical role in order to reduce the political uncertainty.
Firstly, the goal of this study is to examine the relationship between political uncertainty and CSR, and discover if CEO narcissism plays a significant role within this. Secondly, the goal is to understand if narcistic CEO’s tend to use a political connected board.
This paper contributes to the literature in several ways. Firstly, by examining CEO narcissism as a characteristic, therefore extending the upper echelons perspective. Secondly, the research contributes to the growing literature concerning CSR, political uncertainty and CEO narcissism. Thirdly, the new measurement of Hassan et al. (2017) is being used.
Based on the literature gap and the new way of measurement the following research questions have been formulated:
RQ1: To what extent does CEO narcissism affect the relationship between political uncertainty and CSR?
RQ2: To what extent does the boards’ political connection impact the role of CEO narcissism on the relationship between political uncertainty and CSR?
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II
Literature review
Within this chapter, the theory and underlying literature regarding the research are discussed and a conceptual model is presented to visualize the study.
CSR
Several decades ago corporate social responsibility (CSR) was seen as unnecessary, as firms should be focused on profit maximization (Friedman, 1970). This view changed slowly as Carrol (1979)
presented his CSR pyramid, in which a firm has consecutively the responsibility to be profitable, legal, ethical and philanthropical. The pyramid is being criticized for having a standard prioritization, which is not the case for developing markets (Visser & Hollender, 2011). Still, the importance of CSR is present in both developed and developing markets according to Crane & Matten (2016).
In the 90’s John Elkington (1999) introduced the triple-bottom-line, also known as the people, profit (or prosperity) and planet elements. These elements have the function to support sustainability, making it the end goal. The elements of the triple-bottom-line can be seen as interconnective (Wilson, 2015). Besides, CSR can be seen as a competitive advantage when integrated within the company’s strategy (Emerald Insight, 2018).
CSR can currently be defined as the understanding that firms are part of the society they operate in (Khan et al. 2012). The society is made of stakeholders, as Freeman (1984) stated that stakeholders are ‘any group or individual who can affect or is affected by the achievement of an organization’s
purpose’. This stakeholder theory is relevant to CSR initiatives since Wood (1991) claimed that active investors emphasize CSR via shareholders proposals. Since then, the globalization created more stakeholders that firms need to be aware of (Carroll, 2015).
The stakeholder theory is suggested to be relevant as there is evidence that CSR practices are likely to be value enhancing. Recent literature shows that CSR initiatives can lead to more customers (Lev, Petrovits, & Radhakrishnan, 2010), less transaction costs (El Ghoul, Guedhami, & Kim, 2017) and an improvement of corporate reputation (Odriozola & Baraibar-Diez, 2017). As a consequence, firms disclose relatively more information on CSR. Nevertheless, almost a third of the papers in North America did not find a positive correlation between responsibility reporting and financial performance (Fifka, 2013). Moreover, proposal activism from shareholders might reduce the amount of CSR initiatives, as the firm is shifting their resources due to the activism (David, Bloom, & Hillman, 2007). Besides, the authors explained that this can still happen even when firms settle with salient
shareholders.
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also lead to agency costs (Jensen & Meckling, 1976). This means that CSR is used as a tool to push the CEO’s agenda at the cost of the shareholders, according to Friedman. Thus, besides the
stakeholders, the CSR initiatives are of importance for the CEO himself. It can cause a conflict between shareholders as CSR overinvestment can lead to a lower firm value (Barnea & Rubin, 2010). If both stakeholders and CEO’s are taken into account as driving force behind CSR initiatives, then CSR practices consist of both external and internal drivers.
Political uncertainty
Although the agency theory explains why CEO’s can differ from each other regarding CSR initiatives, the stakeholder theory is still relevant as this theory also includes the environment in which the firm operates. The environment can differ over time, and in between firms, in which the level of political uncertainty causes firms to reevaluate business decisions. The trade barriers between the US and China, or the ‘Brexit’, are examples of political risks that impacts firms. Therefore, firms need to find a good trade-off between covering these risks and CSR expenditure.
In a recent paper, Hassan et al. (2017) developed a technique to quantify the political risks on a firm-level. The variation within this paper is mostly on a firm-level perspective (idiosyncratic), rather than on a sector or economy itself. This firm-level perspective is therefore relevant to this research as CEO’s can be considered leading figures of the firm (Kenton, 2019).
The authors show evidence that firms who face high political uncertainty tend to mitigate the political risks, by active engagement and certain passive reactions. Active engagement involves shifting the firms focus on lobbying and donating. It is primarily concentrated among bigger firms, as these firms have a larger impact on political decisions (Olson, 1965). Passive reactions on the other hand, is seen within all firms who face high political uncertainty. The passive reactions include reducing hiring and investments, and are primarily used to ensure option value.
Besides, other literature indicate that when political uncertainty is relatively high, firms tend to reduce investment expenditures (Gulen & Ion, 2016; Julio & Yook, 2016; Bloom N. , 2009). Moreover, the political risks are associated with tightened financial conditions (Arellano, Bai, & Kehoe, 2016; Bloom, Floetotto, Jaimovich, Saporta‐ Eksten, & Terry, 2018). A reduction in investment expenditures and a tightened financial condition shows that firms need to redecide their CSR initiatives. Thus, CSR initiatives are likely to be reduced when the level of political uncertainty is high. Therefore, the following hypothesis can be formulated:
Hypothesis 1
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CEO narcissism
In the paper of Li et al. (2016) it’s stated that CEO power is negatively correlated with CSR practices, while CSR itself is considered value-enhancing. Nevertheless, this CEO power is identified as a structural power, as Li et al. (2016) looks at whether the CEO is the chair of the board. Therefore, it does not provide evidence whether this negative correlation still holds on a more personal level. This personal level is important, as the internal drivers tend to come from the CEO, as they are considered to be leading figures of the firm (Kenton, 2019).
In a recent study, Petrenko et al. (2016) provides evidence that CSR initiatives are more common if the CEO is narcistic. Whether a CEO is narcistic can therefore be of importance as it impacts the firm outcomes (Miller, Burke, & Glick, 1998). This is based on the upper echelons theory which Hambrick & Mason (1984) developed. Hambrick & Mason argued that the impact of individual characteristics are due to cognitive base and values of the CEO. This creates a bounded reality in which a manager can decide what to do, according to the situation. The situation is perceived differently by CEO’s and thus outcomes can differ. It resembles the environment from the stakeholder theory, and the situation with the organization itself.
Decisions concerning CSR for instance are therefore based on the aforementioned situation and the CEO’s themselves. Therefore, the individual characteristics of a CEO are of importance for the firm as a whole. Figure 1 is displaying this concept.
Figure 1: Strategic choice under conditions of bounded rationality.
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characteristics, values that a CEO holds are of importance too. Some of these values corresponds with the political orientation of a CEO according to Barnea and Swartz (1998). Republican CEO’s are less engaged in tax avoidance (Christensen, Dhaliwal, Boivie, & Graffin, 2015) for example, this in regard to their Democratic counterparts.
The given individual characteristics are not a limitation as Hambrick & Mason (1984) states, these traits should be seen as illustrative. CEO narcissism can therefore also be considered as an individual characteristic, as Varize et al (2008) viewed narcissism as a personality trait. Thus, CEO narcissism can be taken into account as potential significant to certain decisions. This can already be seen in several studies in the last couple of years: narcistic CEO’s engage relatively more in corporate tax shelters (Olsen & Stekelburg, 2016), tend to overinvest and prefer an aggressive management style (Ham, Seybert, & Wang, 2018).
Figure 2: An upper echelons perspective of organizations.
In the study of Petrenko et al. (2016) the authors explain that CSR practices can be a fulfillment for narcissistic CEOs, as narcissists have a need for attention and image reinforcement. As mentioned in the last chapter, investing in CSR can help to create a positive image surrounding the firm and the CEO, therefore it can contribute to fulfill the needs of a narcistic CEO.
Chatterjee & Pollock (2017) also mentioned that narcist have a need for acclaim and to dominate decision-making at the same time. The name itself comes from the Greek myth called Echo and Narcissus. Narcissus is cursed as he did not love others. He becomes in love with himself, ultimately leading to his death (Ovid, 1796).
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themself (Freud, 1914). The literature regarding narcissism grows, especially since the theory of Hambrick & Mason (1984). A year later Alicke (1985) conducted an investigation which showed that people see themselves having relatively more desirable traits in comparison to the average person. This better than average (BTA) effect is widely researched (Brown J. D., 2012).
According to several tests narcissism can be measured, meaning that it’s about the level of narcissism instead of being it or not. Raskin & Hall (1981) developed the Narcissistic Personality Inventory (NPI) which is a fair indication to the extent to which a person is narcistic (Raskin & Terry, 1988) However, NPI does not indicate whether someone has clinical narcissism (Vater, et al., 2012; Miller & Campbell, 2008). Besides, Brown et al. (2009) criticizes NPI for being too unidimensional-focused, and emphasizes the distinguishing between the aspects of grandiosity and entitlement. Moreover, the outcome of being a certain level of narcissism isn’t necessary a bad thing. This because
self-enhancement is associated with good mental health (Taylor, Lerner, Sherman, Sage, & McDowell, 2003), even if self-enhancers score high on being narcissists (Paulhus, 1998). Ames, Rose & Anderson (2006), on the other hand, measured narcissism according to questions involving sense of self,
entitlement, preoccupation with success and demand for admiration. And more recently the question was raised whether narcissism is subjected to certain generations (Twenge JM, 2010; Credo, Lanier, Matherne, & Cox, 2016; Young, Dworkis, & Olsen, 2016).
Currently clinical narcissism is seen as a mental disorder (Narcissistic Personality Disorder, NPD). The NPD is defined as “a mental condition in which people have an inflated sense of their own importance, a deep need for excessive attention and admiration, troubled relationships, and a lack of empathy for others” (Staff, 2017). Psychologist dr. Craig Malkin views pathological narcissism as having ‘EEE’ or ‘Triple E’: a) Exploitation, meaning doing meeting their needs, no matter the cost compared to others, b), Entitlement, asking and acting as if we should all bend to their will and c) Empathy impairment, in which they can feel empathy but normally have a lack of it (Malkin, 2015). Aforementioned, the individual characteristics of a CEO influences the firm outcomes. CEO
narcissism is therefore likely to have an impact. Narcistic CEO’s tend to have an overall higher risk acceptance due to their overconfidence (Campbell, Goodie, & Foster, 2004; Foster, Shenesey, & Goff, 2009), which can be of influence in regard to their CSR practices. Therefore, the assumption can be made that narcistic CEO’s tend to be exposed to greater risks, including political risks. As narcistic CEO’s are more familiar with a firm facing high risks, the political uncertainty can have different outcomes than expected. Passive reactions, such as retrenching hiring and overall investment, might still occur. More specifically, the investment in CSR is still most likely. This because narcistic CEO’s mainly use CSR to “attract both praise and attention for the CEO because they are usually both
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Besides, the narcistic CEO can benefit from the political high-risk situation, as other firms are likely to reduce CSR investments. Therefore, CSR practices of a firm with a narcistic CEO can result in a positive long-term effect. This means that stakeholders are relatively more satisfied, resulting in more acclaim to the narcistic CEO. Thus, it can be expected that narcistic CEO’s still invest in CSR even when political uncertainty is high. Therefore, the following hypothesis is formulated:
Hypothesis 2
H2: CEO narcissism weakens the relationship between political uncertainty and CSR.
Political connection
The impact of political uncertainty can also be reduced, by having a political connection, according to a recent paper from Chi (2018), as politically affiliated directors share their insights with the CEO. The board itself is relevant as it’s represents the shareholders and ensures that the company act on behalf of them (Board of Directors, 2019). It’s important to note that US firms have an one-tiered structure, as board structure mostly depends on countries where the firm operates (Millet‐ Reyes & Zhao, 2010). With this one-tiered structure, the supervisory board is non-existent, and the CEO is the chairman of the board. With adding a politically affiliated director within the board, the CEO builds a stronger support for his cause.
Moreover, Ackey (2015) noted that firms who supported a winning candidate, had a relatively higher return than firms who supported a losing candidate. A political connected board tend to receive more procurement contracts (Goldman, Rocholl, & So, 2013), have less tightened financial constraints (Chi, 2018), and are more likely to increase firm value (Bunkanwanicha & Wiwattanakantang, 2009). Besides, they receive less government oversight (Correia, 2014). In addition, having a political connection can be an answer to political risks, as it involves lobbying (active engagement).
Besides the positive side effects, Aggarwal et al. (2012) found strong support that donations are negatively related to annual excess returns. Having a political connection can also lead to advancing the political ideas of the corporate executives, as most US shareholders view political donations as non-beneficial (Aggarwal, Meschke, & and Wang, 2012). As narcistic CEO’s are exploitative and entitled (Malkin, 2015), the assumption can therefore be made that narcistic CEO’s have the incentive to have such a connection based on this view.
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(Campbell, Goodie, & Foster, 2004; Foster, Shenesey, & Goff, 2009). Having a political connection might even higher this risk acceptance. The narcistic CEO is therefore more able to impact the decision-making regarding CSR initiatives.
Thus, narcistic CEO’s are more likely to establish political connections within their boards, even when the firm is faced with high political uncertainty. Therefore, it is interesting to research if this has a strengthening effect on the role of CEO narcissism on the relationship of the first hypothesis.
Hypothesis 3
H3: The boards’ political connection has a strengthening effect on the weakening role of CEO narcissism on the relationship between political uncertainty and CSR.
Conceptual model
All three hypotheses, including their effects, are visualized in the conceptual model (figure 3).
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III Methodology
This section provides insight in the methodology that is applied. Firstly, the sample, that is used within this research, will be explained. Secondly, every hypothesis including their variables will be described in the empirical model. Lastly, the conducted analysis is described.
Sample
In this study, the sample includes all S&P500 listed firms included in the ASSET4 database between the years 2002-2016.1 The American S&P 500 consist of the largest firms based on their market capitalization (LLC, S. D. 2019). After excluding missing numbers, the initial sample regarding CSR practices consists of 55.306 observations from 7.723 firms. The initial sample is matched with several datasets. Firstly, the data in the paper of Hassan et al. (2017) is used for the political uncertainty. Furthermore, the CEO narcissism scores are computed using ExecuComp and LexisNexis databases and hand-collected data from the annual reports. Financial firms with the Standard Industrial Classification (SIC) between 6000-6999 are excluded, this because these firms are restricted on regulations regarding the level of executive compensation. This if important as one of the CEO narcissism measurement factors consists of this compensation.
Besides, to incorporate boards’ political connection, BoardEx is used. The observations without a clear start or end date were excluded from the data set. Finally, firm-specific accounting controlling
variables are obtained from Compustat North America database. Many non-US firms had no data available regarding control variables, leading to mostly American S&P listed firms. After excluding the missing data and filtering the right time frame (2002-2016), my final sample to conduct the analysis consist of 271 observations from 86 firms.
Empirical model
To test Hypothesis 1, in line with (REF), the following research model is used. CSP = α + β1 Prisk + β2 PolX + β3 Risk + β4 NPRisk + β5 Age + β6 Shares_CEO + β7 Ratio_AL + β8 Sales + β9 RE + Industry, Country and Year dummies + ε
(1)
In model 1 the dependent variable is CSP (CSP). Choosing CSP instead of CSR arises from the fact that, besides environmental and social data, governance data is already incorporated within the
1 This database consists of environmental, social and governance data including more than 250 key performance
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political variable. The database ASSET4 is used when measuring the CSP variable. An average is calculated of two CSP components, namely: the environmental and social score.
The variable of interest in Model 1 is political uncertainty (Prisk) which is gathered from the Hassan et al. (2017) paper. Political uncertainty is measured using the quarterly earnings conference calls of a firm, whereas political text is separated from non-political text. Within these call bigrams (two-word combinations) are formed. These bigrams serve to indicate the times a firm talks about a political topic, by looking at synonyms of ‘risks’ or ‘uncertainty’ (see appendix I). The time of the conference call is also taken into account, resulting into a weighted sum of relevant bigrams (Prisk).
There are several control variables that are taken into account. Firstly, the control variables
that Hassan et al. (2017) created are used to ensure that the political uncertainty is measured. Firstly,
the political exposure of the firm (PolX) is calculated. Secondly, the level of political uncertainty that a firm faces is measured by looking at the number of synonyms of risk or uncertainty within theconference transcript (Risk). Thirdly, the time dedicated to non-political topics is measured (NPRisk). Additionally, the age and the percentage of the company’s shares owned by the CEO are taken into account. This because the age might play a role concerning the prioritizing of CSR practices. Besides, the amount of company’s shares owned by the CEO can create an external motivation that can impact firm decisions.
On the firm-level perspective there are some other control variables that are of interest. Firstly, the ratio between assets and liabilities (Ratio_AL) is taken into account, as it might influence the amount of CSR investments of the firm. Besides, the sales (Sales) and the retained earnings (RE) of the firms are incorporated as both control variables measure the size of the firm.
The variable of interest in model 1 is Prisk, which captures the level of political uncertainty of a firm. What can be expected is the coefficient of the variable to be negative.
To test Hypothesis 2, CEO narcissism is incorporated into the research model.
CSP = α + β1 Prisk + β2 CEO_Narc + β3 Prisk x CEO_Narc + β4 PolX + β5 Risk + β6 NPRisk
+ β7 Age + β8 Shares_CEO + β9 Ratio_AL + β10 Sales + β11 RE + Industry, Country and Year
dummies + ε
(2)
Where CEO_Narc represents CEO narcissism. Following Chatterjee, & Hambrick (2007), I will measure CEO narcissism using the following items;
(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;
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(4) the CEO’s total number of words in the company’s letter to shareholders; (5) the CEO’s relative cash and non-cash compensation.
Firstly, the prominence of the CEO’s photograph within the annual report is of importance, as it can be an indicator whether the CEO likes to present himself. The way the photograph is taken is also of interest. For example, the CEO who is consequently photographed with others is less visible than a CEO who has a one-page portrait. Therefore, there are four classifications to be made in which the level of prominence can be seen:
(1) the CEO was not photographed;
(2) the CEO was photographed with other executives;
(3) the CEO’s photograph was of him or her alone and occupied less than half of the page;
(4) the CEO’s photograph was of him or her alone and occupied more than half of the page with text taking up some space on the page;
(5) the CEO’s photograph was of him or her alone and occupied the whole page.
Besides the prominence of the CEO’s photograph, the prominence of the CEO can also be measured through press coverage. Press coverage have a majority of positive, or at least neutral, news associated with the CEO according to Chatterjee, & Hambrick (2007). Therefore, the prominence of the CEO is an important indicator whether the CEO is narcistic. LexisNexis provides this due to their coverage of major world publications. All relevant publications will be downloaded, and the CEO’s name is searched and counted.
Moreover, the letter to shareholders is also of importance. Within this letter the CEO communicates directly to his shareholders. In this speech the usage of first-person singular pronouns is measured. The times ‘I’ and ‘My’ is calculated which gives an indicator whether the CEO likes to talk about himself (Raskin & Shaw, Narcissism and the use of personal pronouns., 1988). Besides, when the usage of first-person singular pronouns is high, the CEO is taken credit for the achievements and goals of the firm. This because there are CEO’s which rather talks about ‘We’. The total number of words within the speech is also calculated, as it can give an insight whether the CEO likes to present himself and it put the first-person singular pronouns in perspective.
Lastly, the CEO’s compensation is relevant, as prior studies signals a relationship between CEO narcissism and compensation (Ham, Seybert, & Wang, 2018; O'Reilly, Doerr, Caldwell, & Chatman, 2014). Narcistic CEO’s are likely to achieve higher compensation due to their overconfidence and their image. The compensation is measured through both the cash compensation (i.e. salary and bonus) and non-cash compensation (i.e. stock grants and options) which a CEO receives.
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The variable of interest in the model 2 is the interaction term Prisk x CEO_Narc, which captures the relationship between political uncertainty of a firm and the narcissism score of the CEO. What can be expected is the coefficient of the interaction term to be positive.
Finally, Hypothesis 3 will be tested using the following research model.
CSP = α + β1 Prisk + β2 CEO_Narc + β3 Prisk x CEO_Narc + β4 Pcon_dummy + β5 Prisk x Pcon_dummy + β6 Pcon_dummy x CEO_Narc
+ β7 Prisk x CEO_Narc x Pcon_dummy + β8 PolX + β9 Risk + β10 NPRisk + β11 Age + β12 Shares_CEO + β13 Ratio_AL + β14 Sales + β15 RE + Industry, Country and Year
dummies + ε
(3)
Where Pcon_dummy is the boards’ political connection. The measurement of political connection starts with stating the political experience from the directors within BoardEx. The tenure of these directors needs to be matched with the tenure of the CEO within the sample.
The testing variable in the model 3 is the interaction term Prisk x CEO_Narc v x Pcon_dummy. This captures the impact of the boards’ political connection on the relationship between the level of political uncertainty and the CEO narcissism score. What can be expected is that the impact of the boards’ political connection is positive.
Analysis
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IV Results
This chapter gives an overview of the results of this study. Firstly, the descriptive statistics will be shown. The histograms of the (in)dependent variables, can be seen in appendix II. Secondly, the correlation analysis is taken into account. Lastly, the results of the multivariate regression analysis are presented including their implications.
Descriptive statistics
Descriptive statistics helps us to generate a general view of the dataset (see figure 4). All variables, excluding the dummies, are winsorized meaning that the impact of outliers is being reduced. The histograms (appendix II) shows the standardized values of the winsorized variables.
According to the 271 observations, the political risk variable has a high maximum (482.77) in
comparison with the mean (77.34). The histogram gives a similar view. This indicates that the level of political uncertainty for some firms are extremely high. Besides, many firms tend to have a low level of political uncertainty, according to the histogram.
Besides the political risk, the data of the variable CSP has not any outstanding information on first sight. When looking at the histogram, a skewed-to-the-left histogram can be seen. It indicates that for some firms CSR practices are of major interest, this in regard to other firms whom tend to not prioritize this as such.
17 Table 1: Descriptive statistics.
Correlation analysis
With the correlation analysis the linkage between the variables can be made clear. A correlation does not automatically mean that there is causation, thus the prime objective of this analysis is to display the relationship between the variables. The correlation analysis (table 3) shows that the correlation between CSR and political uncertainty are not significant correlated with each other (0.0989), which is not in line with the expectation. Nevertheless, several other variables do have a significant correlation with CSR: CEO narcissism, age, sales and retained earnings.
The correlation between the control variables Risk and NPRisk is worth investigating, as the
18 Table 2: Correlation analysis.
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Regression analysis
The regression analysis for all hypothesis can be found in the appendices III - V. A panel regression is used to analyze the regression, as a panel dataset is used within this research. The random effect is incorporated. An alpha-level of 0.05 is used to determine whether a variable have sufficient support to be statistically significant. All four regression analyses have a probability value lower than five percent concerning chi-squared, meaning that there are no coefficients which are zero. Besides, the intraclass correlation (rho) are all above 0.75, meaning that the consistency can be qualified as good (Koo & Li, 2016).
For the first hypothesis a regression analysis is needed between the dependent variable (CSP) and the independent variable (Prisk). The coefficient indicates that the political uncertainty and CSR practices have a slightly negative association. The R-squared between is 0.084, meaning that 8,40% of the variance between panel units is explained.The p-value is 0.941, meaning that the relationship found no support for the first hypothesis. The results suggests that there is no evidence to be found regarding the relationship between the level of political uncertainty and the level of CSR investments.
In regard to the second hypothesis, the CEO narcissism score is incorporated (CEO_Narc). The R-squared between is 0.1244, which is higher than the first hypothesis, but can still be considered low as it only explains 12.44% of the variance.While there was not sufficient support for hypothesis 1, the interaction variable creates support that there is an association between CEO narcissism and the level of the political risk, as it has a P-value of 0.016 (β = 0.0957). Figure 4 depicts a scatterplot of this relationship. As been found in the first regression analysis, the relationship of the first hypothesis (CSP x β1 Prisk) is still less convincing even by including the CEO narcissism score (p = 0.463). This indicates that, while there is an association between CEO narcissism and CSR, the initial relationship between political risk and CSR is still insignificant.
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The third hypothesis includes the political connection of the board (PCon_dummy) in relation to a CEO with a known narcissism score. The R-squared between is 0.1145, which is in line with the second hypothesis. The regression analyses indicate that the interaction variable is statistically insignificant (p = 0.321), with a positive coefficient (β = 0.0808). This indicates that there is no proof that a political connected board impacts the weakening role of CEO narcissism regarding political risk and CSR. However, the interaction variables Pcon_dummy versus CEO_Narc is of interest, as they show a significance (p = 0.000) with a negative coefficient (β = -0.9512). This means that narcistic CEO’s are more likely to have a political connected board (see figure 5).
Figure 5: Scatterplot between the board’s political connection and the level of CEO narcissism. The control variable Age is the only significant control variable which can only be directed to this hypothesis (p = 0.020, β = 0.1907). This suggests that, if political connection data is added, the age of a CEO has a positive relationship with the CSR practices of a firm. In all the analyses, the control variable Shares_CEO is statistically significant at the 1% level as the p-value is below 0.010. It has a positive coefficient ranging from 0.1230 to 0.1400. This indicates that the amount of company’s shares that a CEO holds, has a positive relationship with the CSR practices of the firm (see figure 6).
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V
Discussion and conclusion
The final chapter will discuss the results and conclude the research questions of this study. Besides these implications, the limitations and further research will be addressed.
Implications
The findings in the previous chapter are an answer to the research questions of this study:
RQ1: To what extent does CEO narcissism affect the relationship between political uncertainty and CSR?
RQ2: To what extent does the boards’ political connection impact the role of CEO narcissism on the relationship between political uncertainty and CSR?
To answer the first research question, the relationship between political uncertainty and CSR needs to be clear. Within this study, the findings suggest that there is no statistical proof that the level of political uncertainty affects the CSR practices of a firm. Given the stakeholder theory, the advantages of CSR investing (e.g. higher reputation) might outweigh the cons of having a high level of political uncertainty. Even if the shareholders want to reduce CSR investing, the agency theory can play a role, as a CEO can act differently than the owner. This is in line with the paper of Barnea & Rubin (2010), as the level of CSR expenditures can be greater than the level in which firm value is maximized. Thus, the CEO can gain personal benefits, even if the situation calls for a decrease in CSR expenditures. The effect of CEO narcissism is studied in the second hypothesis. This effect on CSR practices is directly significant, making it of importance whether a CEO is narcistic concerning the firm’s CSR. This indicates that narcistic CEO’s have a personal instinct to uphold CSR practices, in order to attract both praise and attention, as Petrenko et al. described (2016). The findings also suggest that there is significant evidence regarding the association between CEO narcissism and the political risk of a firm. This indicates that narcistic CEO’s tend to lead firms with a relatively high level of political
uncertainty. A possible explanation for this is the natural overconfidence, that narcistic CEO’s have, which creates an overall higher risk acceptance (Campbell, Goodie, & Foster, 2004; Foster, Shenesey, & Goff, 2009). Therefore, they do not prioritize mitigating risks as much than their non-narcistic counterparts.
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addition, this study used the new method to quantify the political risk data concerning from Hassan et al. (2017), contributing to the validation of this method for future research. Regarding the managerial implications, CEO narcissism needs to be addressed as a possible influencer, especially concerning risk decision-making.
The second research question involves the political connection within the board. The findings are not consistent with the expected outcome, as the political connection does not significantly impacts the relationship between CEO narcissism and political risk. However, the findings suggests that having a political connected board is more common among narcistic CEO’s. A possible explanation is that narcistic CEO’s can create an even higher risk acceptance with a political connection, besides their natural overconfidence. The age of a CEO is likely to also play a role
Besides, this study suggests that the amount of company’s shares that the CEO owns, has a positive relationship with the CSR practices of the company. This is in line with the agency theory, as
managers tend to act differently than the owners of a firm. As CEO’s have more company shares, they shift to being a manager and an owner, thus can act differently regarding CSR practices. Therefore, managers should note that owning company stocks might help to reduce the agency problem. By answering this second research question, this study contributes to the literature involving political connections. Moreover, whereas Chi (2018) showed the effect of having a political connection on a firm-level, this study researched it on a personal-level.
Limitations and further research
The methods used within this study have certain limitations. Firstly, the score of CEO narcissism is partly based on the CEO’s prominence in the company’s press releases. This is measured through the amount of Major World Publications of a CEO from LexisNexis. The name of the CEO can be cited differently in these publications. Besides, the name itself might not be unique, which can lead to a false image when these names are counted. Secondly, Hassan et al. (2017) recently created a method to calculate political risk, which has not fully been validated. Thirdly, the relationship between CEO narcissism and political connections might intertwine, as both result in excessive risk-taking, therefore, making both variables interdependent from each other (Foster, Shenesey, & Goff, 2009; Chi, 2018). Lastly, the sample size consists of mainly American firms, therefore this study should be taken into context in order to generalize the findings. Political risk, for example, can be restricted to a nation.
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the reason and relationship itself, between the CEO’s owned company shares and CSR, can be explored.
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Appendix I
Synonyms
Synonyms regarding political uncertainty, sorted on frequency
I II III
Risk Vague Riskiest
Risks Erratic Hairy
Uncertainty Query Dubious Variable Jeopardize Riskiness Chance Unsettled Treacherous Possibility Unpredictability Oscillating Pending Dilemma Perilous Uncertainties Hesitancy Tentativeness Uncertain Riskier Unreliability Doubt Unresolved Wariness
Bet Unsure Vagueness
Variability Irregular Dodgy Exposed Jeopardy Equivocation Likelihood Suspicion Scepticism Threat Risking Indecisive Probability Peril Chancy Varying Hesitating Menace
Unclear Risked Qualm
Unpredictable Unreliable Vacillating Speculative Unsafe Gnarly
Fear Hazy Disquiet
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Appendix II
Histograms (in)dependent variables
Histogram of the standardized political risk (zPrisk)
Histogram of the standardized CSR (zCSP)
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Appendix III Regression analysis hypothesis 1
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