Narcissistic CEOs and Firm Performance: The role of entrepreneurial orientation and firm growth.
Valerie Gogel (S2834812)
Master Thesis
Supervisor: Prof. Dr. Jana Oehmichen
Second Assessor: Dr. Björn Mitzinneck
MSc Business Administration: Change Management
Faculty of Economics and Business
University of Groningen
20.01.2020
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Abstract
This research explores the potential benefits CEO narcissism can have on organizational outcomes. Specifically, it aims to expand on the currently under-researched field investigating the organizational contexts that facilitate the bold and change oriented decision-making commonly associated with narcissistic CEOs. This study does this by expanding on the pre-existing research into the relationship of entrepreneurial orientation and CEO narcissism in predicting firm performance. It also tests whether firm growth provides a context that positively enhances this relationship to predict superior firm performance. These relationships are tested with data retrieved from numerous online databases including Datasteam, SeekingAlpha, Orbis and BoardEx. To test the hypothesized relationships, a random-effects panel data regression analysis is conducted through STATA. The outcomes of this study were unable to find any support for the hypothesized relationships in this sample. But makes first indications that firm growth does positively enhance the CEO narcissism – EO relationship to positively predict firm performance. As this study was conducted with exclusively S&P 500 listed companies, who were found to have low entrepreneurial orientation and slow growth rate on average, the outcomes could have been different if companies were included in the sample that have an entrepreneurial outlook and are motivated by fast growth. This study contributes to existing research by discovering firm growth as a potential organizational context positively facilitating narcissistic CEOs. It also urges the further investigation of the contexts that permit for the positive aspects of narcissistic CEOs to be used to the advantage of organization’s performance.
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Title: Narcissistic CEOs and Firm Performance: Do entrepreneurial orientation and fast growth provide conditions that facilitate narcissistic CEOs?
Introduction
While narcissism is one of the most prominent traits visible in CEO’s of top companies, much emphasis has been placed on the negative consequences rather than the benefits it can have for organizational outcomes. Narcissists are known to exhibit high levels of confidence, a preference for exaggerated goals and constantly seeking the admiration and attention of others. With their high need for exaggeration and attention, the CEO position is very attractive to narcissists due to its visible status and power (Hambrick, Finkelstein & Mooney, 2005). As posited by upper echelon theory, personality traits of CEOs can have a substantial impact on organizational outcomes (Mason and Hambrick, 2007). Their psychological attributes serve as a lens, which determines how they view strategic situations, the decisions they make, and the outcome of those on the organization (Nadkarni & Hermann, 2010). Mark Zuckerberg, Elon Musk and Steve Jobs are among the CEOs who have been suggested to exhibit traits of
narcissism (Maccoby, 2004). All have been well represented in the media radiating confidence that almost feels like they are untouchable and making strategic decisions that have been widely questioned. Nonetheless, Facebook, Tesla and Apple are argued to be some of the most successful companies of this century. That begs the questions, what allowed these CEOs with an enhanced sense of self to drive their companies to become the market leaders they are today?
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more open to novel solutions and embrace change, which leads them to invest more financial and workforce resources to the implementation of entrepreneurial activities (Campbell et al., 2011). Unlike other CEOs, narcissists have also been found to have a low avoidance focus, meaning they are more prone to make risky decisions as they are not as concerned about the potential negative consequences (Patel and Cooper, 2014). This focus has shown to have positive outcome on performance in times following an economic distress where most CEOs take a cautious approach to minimize the risk of losses (Patel and Cooper, 2014).
CEO narcissism has repeatedly been linked to an entrepreneurial and innovative organizational outlook (Chatterjee and Hambrick, 2007; Campbell et al., 2011;
Hirshleifer, Low and Teoh, 2012; Patel and Cooper, 2014). Studies that aimed to corroborate these findings, found CEO narcissism to align with an entrepreneurial orientation (EO) in organizations (Gerstner, Konig, Enders, and Hambrick, 2013; Wales, Patel and Lumpkin, 2014; Engelen, Neumann and Schmidt, 2016). Narcissistic CEOs encourage innovativeness and entrepreneurship through new product introductions (Kashmiri, Nicol, and Arora, 2017), obtaining more patents (Hirshleifer et al., 2012), and expanding internationally (Chatterjee and Hambrick, 2007). However, whether this entrepreneurial orientation benefits the organizational performance has been found to depend on the organizational- and market contexts (Campbell, 2011). Initial findings suggest CEO narcissism to be more beneficial in chaotic and fast-moving markets, that require CEOs to make bold and change oriented decisions to remain competitive (Covin and Slevin, 1989; Campbell and Campbell, 2009; Engelen et al., 2016).
This study will aim to validate research on the relationship between CEO
narcissism and EO in predicting firm performance, while also expanding research into the organizational contexts that allows for the harvesting of narcissistic CEOs strengths to achieve a superior firm performance. To do this, the moderating role of EO in the CEO narcissism-firm performance relationship will be tested, while also testing whether fast growth provides a market condition that positively facilitates this relationship. Fast growth was selected as an interesting contingency variable, as it was found that
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conducted with a sample of 58 S&P 500 listed firms and will test the hypothesis using a random-effects regression.
Literature Review
This section will elaborate on the concepts that are used in this study and on existing literature on which the conceptual model and hypothesis of this study are based. Narcissism
The first known conceptualization of Narcissism in the clinical setting is found in the works of sexologist Havelock Ellis (1898). He developed this interest based on the character of a young man named Narcissus in Greek mythology who fell in love with his own reflection in the water, eventually leading him to drown in the same water as a result of his self-obsession (Chatterjee & Hambrick, 2007). Ellis (1898) used narcissism as a term to describe individuals who are sexually attracted to themselves. This definition of narcissism also motivated Freud’s book ‘On Narcissism’. In which he suggested multiple explanations and outcomes of narcissism but the most relevant to this day is his
proposition of narcissists being attached more to themselves than to others (Baranger, 1991 on Freud, 1914). According to Freud, narcissists will perceive all interpersonal relationships as a way, of regulating their libido, which in turn strengthens their positive feelings towards themselves. He also believed narcissists to experience no sensation of caring for others (Freud, 1914). Although a large amount of concepts that Freud strongly emphasized and popularized in the 20th century were debunked, his idea of using
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Although narcissism was conceptualized and labelled as a mental disorder, it has been reconceptualised as a personality dimension that individuals can be scored on (Raskin & Terry, 1988). Like other personality traits, narcissism has cognitive and motivational elements that lead to specific outcomes in behaviour of individuals. The cognitive element of narcissism entails the idea of narcissist’s enhanced view of their capabilities and qualities. Individuals high in the narcissistic trait tend to view themselves as superior in intelligence, creativity, competence and leadership abilities. They radiate a high degree of confidence in themselves and their abilities. This confidence tends to be perceived as overconfidence by others in their environment (Campbell, Goodie, & Foster, 2004). On the motivational side of narcissism, lies the “narcissistic supply” that
narcissistic individuals crave. They require a continuous reaffirmation of their superiority and power to reinforce their image (Kohut & Wolf, 1986). This reaffirmation must come in the form of affirmation, applause and adulation from individuals in their environment (Baumeister & Wallace, 2002). To obtain this continuous affirmation and reinforcement, narcissists are motivated to regularly take bold and challenging actions that are visible to a large audience (Baumeister & Wallace, 2002). These bold tasks tend to be highly recognized and applauded due to the risk that is commonly attached to them. Narcissists are also very susceptible to boredom and therefore favour tasks and opportunities that are grandiose and exciting (Wink & Donahue, 1997).
Upper Echelon Theory
The relationship between leadership personality and organizational outcomes was first introduced by Mason and Hambrick (1984), who originated the Upper Echelon Theory. It states that the values, experiences and dispositions of the top-management influence their choices and ultimately the outcomes of the organization.
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Simons, 1958; Hambrick & Mason, 1984). Every decision-maker will have a set of values and principles that guide their decision-making in an administrative and strategic context and which can determine their strategic choice (Hambrick & Mason, 1984). Multiple studies conducted in line with the Upper Echelon Theory have used
demographic characteristics (for example age, ethnicity and tenure) as characteristics to predict organizational performance, due to the ease of operationalizing and measuring these constructs (Mason & Hambrick; Priem, Lyon & Dess, 1999). Both demographic and background information have been found to significantly predict a variety of work-related behaviours, such as job involvement (Sekaran & Mowday, 1981), preferences for non-management jobs (Ritchie & Beardsley, 1978), participation in volunteer work (Schram & Dunsing, 1981), and other attitudes about work held by managers and
workers (Buchholz, 1977). In regards to strategic decision-making for their organization, they found demographic differences in top management to have a potentially positive impact on innovativeness and creativity of organizations (Priem, Lyon & Dess, 1999). These studies identified a research gap that aimed to further explore the underlying mechanisms that result in top management characteristics becoming mirrored in the organization outcomes (Nadkarni & Herrmann, 2010). While demographic characteristics have a larger reach of indication, for example educational background may also serve as an indicator of socioeconomic background, motivation, cognitive style, risk propensity, and other underlying traits, they cannot serve as indicators for values and perceptions (Mason & Hambrick, 1984).
Little current research has successfully measured personality variables, such as values and perceptions of top management in organizations (Mason & Hambrick, 1984). The reason for this is that top management may fear being exposed and placed in a negative light as the outcome of the results of a personality assessment (Mason & Hambrick, 1984). The research that on the other hand have successfully measured the impact of personality constructs found them to have a stronger and more consistent impact on the decision-making and choices of top management (Priem, Lyon & Dess, 1999). With this knowledge in mind, it is important to further assess prominent personality traits of organizational leaders and the impacts those can have on
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right leaders, with suitable personalities can be assigned to positions, which will allow organizations to thrive under their leadership.
CEO Narcissism
Previous studies exploring the narcissistic personality trait in CEOs have resulted in mixed findings. While the overarching results indicate CEO narcissism to not have any direct positive impact on organizational outcomes, there are some studies that indicate this trait to be a potential success factor under certain market conditions and when an organization has change oriented goals (Covin and Slevin, 1989; Campbell and Campbell, 2009). To provide some more insight into existing research on CEO
Narcissism and its link to organizational outcomes, a number of prominent studies and findings on this topic will be elaborated on.
A CEO’s personality traits strongly influence firm performance through the CEOs preferences, biases and decisions (Finkelstein & Hambrick, 1996). It also determines the type of people that a CEO will chose to retain in an organization and who they will promote to work closely with It was found that CEOs and other organizational leaders select people who are similar to them in personality and who share their opinions and beliefs (Schneider, Goldstein and Schmidt, 1995). When faced with a number of alternatives, narcissistic CEO’s are most likely to select the alternative that most suits their personal preferences (Thompson, 2017; Kernberg, 1975). By surrounding
themselves with individuals who share their opinions, they enable a working environment where nobody objects to their ideas and supports the CEOs cause, regardless of whether it is advantageous to the organization (Schneider, Goldstein and Schmidt, 1995).
Constructing a management team with similar personality traits and who support the same cause allows narcissistic CEOs to use the organization as a tool to satisfy their own needs (Gupta, Nadkarni and Mariam, 2018).
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narcissistic CEOs to achieve larger gains in their performance after a phase of economic decline unlike firms under non-narcissistic CEOs (Patel and Cooper, 2014). While risk-taking in these periods has been shown to enhance an organization’s competitive position in the long-term, most CEOs will take caution and pursue low-risk opportunities and investments in the period after an economic decline to prevent further losses (Patel and Cooper, 2014). Due their tendency to thrive for boldness, narcissistic CEOs have also been found to encourage innovative and entrepreneurial actions through for example the adoption of technological discontinuities (Gerstner et al., 2013). Studies that attempted to expand the research on the positive impacts that CEO Narcissism could potentially have on organizational outcomes, found the trait to not be sufficient in producing superior firm performance, but to be strongly dependent on context (Campbell and Campbell, 2009). Findings so far suggest CEO narcissism to positively predict organizational outcomes in fast-moving environments where bold and change oriented approaches help organizations remain their competitive advantage (Covin and Slevin, 1989; Campbell and Campbell, 2009; Engelen et al., 2016).
On the other hand, narcissistic CEOs have been believed to actively contribute to worse organizational outcomes through a number of negative aspects of this personality trait. Their strong approach focus towards rewards, has shown to blind them to the possibilities of failure (Lakey, Rose, Campbell and Goodie, 2008; Shapira, 1995; Patel and Cooper, 2014). It encourages them to engage in risky investments with often unknown outcomes, which have been linked to more fluctuations in firm performance (high wins and high losses) (Chatterjee and Hambrick, 2007). The successful outcome of such risky actions satisfies the narcissistic CEOs need for affirmation as they receive media attention and praise for their ‘courageous’ actions and their achievements for the organization (Chatterjee and Hambrick, 2007). This continues to motivate them to seek out rewarding opportunities in their environment but focus little on the negative
consequences these could have on their organizations (Lakey, Rose, Campbell and Goodie, 2008). Another aspect of narcissistic CEOs that has commonly been linked to negative organizational outcomes is narcissists’ leadership (Kets de Vries and Miller, 1985; Bogart, Benotsch and Pavlovic, 2004; McClelland and Burnham, 1976).
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control everything and everyone in the organization (Kets de Vries and Miller, 1985). This leads to the inefficient utilization of resources as it creates a working environment that takes all autonomy from subordinates and therefore prevents them from using their intellectual capabilities to contribute to the organizational outcomes (Kets de Vries and Miller, 1985).
It is therefore predicted that CEO Narcissism in itself will have negative linear effect on firm performance.
H1: There is a negative linear relationship between CEO narcissism and firm performance.
Entrepreneurial Orientation
Firms with high level of entrepreneurial orientation (EO) are firms that score high on the following constructs: innovativeness, pro-activeness and risk taking (Miller, 1983). Their leaders are able to identify opportunities with potential for large returns and need to be willing to pursue these potential opportunities although the outcomes are often uncertain (Anderson, Covin and Slevin, 2009; Covin & Slevin, 1991). A successful pursuit of these opportunities leads organizations to achieve a competitive advantage as they would already be generating wins, while competitors are still be in the process of entering this product market (Covin & Slevin, 1991). Entrepreneurially oriented firms are more viable as EO positively enhances cash flow and expansion through the purchase of other companies (Anderson, De Creu and Nijstad, 2004). Firms that pursue EO are therefore expected to achieve better pricing, costs, volumes, and market penetration than their competitors (Anderson et al., 2004). As posited by the upper echelon theory, the decisions that CEO’s make are influenced by their personal characteristics (Mason and Hambrick, 1984). Therefore suggesting the manifestation of entrepreneurial orientation in a firm to strongly depend on the CEO’s values and perceptions (Hambrick, 2007).
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implementation of entrepreneurial actions (Campbell et al., 2011). Their choices
tendency to be bold and prompt, which are both facilitators of EO since they can result in radical strategic moves with high potential (Covin et al., 2006). Firm leadership,
including CEOs are tasked to determine whether risky and innovative strategies would potentially result in sufficient benefits for the organization (Covin et al, 2006). Due to their high risk-high, high-return orientation, narcissistic CEOs will be more likely to pursue such risky and innovative projects, indicating a strong level of EO (Wales et al., 2013). Rather than being scared off by the potential for failure, they are motivated by the positive outcomes that these entrepreneurial decisions could have on the organization (Wales et al., 2013). Pursuing high-risk, high-return strategies is also attractive to
narcissistic CEOs because it attracts a large amount of attention, which in turn feeds their need for admiration and praise (Chatterjee and Hambrick, 2007).
On the other hand, there are two main aspects that have been found to negatively affect the manifestation of EO in companies led by narcissists. Due to their enhanced perception in their abilities, narcissistic CEOs are often unwilling to admit that one of their decisions was wrong and to stop this action in time, which can lead to valuable resources being wasted on inefficient incentives (Covin et al., 2006). The ability to recognize that an initiative is not effective in a timely manner allows for a quick cycle of trial-and-error, which is important in entrepreneurial companies to survive (Covin et al., 2006). Another aspect is narcissistic leadership. Their dominant and authoritarian
leadership style inhibits the development of entrepreneurial ideas, as subordinates are not given the possibility to voice their ideas and question the current organizational strategies and approaches (Wales et al., 2016). As lower level employees are often more connected to customers, they tend to have a better perception of how to improve products and services to enhance customer satisfaction (Wales, Monsen and McKelvie, 2011).
Based on these findings and the outcomes of Engelen et al. (2016), who found a negative relationship between CEO narcissism and EO, it is predicted that the EO alone will negatively moderate the CEO narcissism – firm performance relationship.
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Firm Growth
Firm growth is characterized as the exponential increase in assets and revenue over time (Penrose, 1959). EO has been found to be a significant strategic mechanism through which firms capture value in new and uncertain opportunities that will ultimately allow them to develop and grow (Covin and Lumpkin, 2011; Rauch, Wikland and
Lumpkin, 2009. A market that is characterized by fast growth requires organizations to ‘go with the flow’. By adopting a strong entrepreneurial orientation and jumping at innovative opportunities, organizations can remain competitive and assure not being outperformed by competitors (Covin and Lumpkin, 2011).
The main goal that a CEO aims to achieve by encouraging firm growth is the achievement of personal gains and the recognition of achievements during their tenure (Aggarwal and Samwich, 2003). These goals are particularly relevant to narcissistic CEOs as they satisfy their need for constant admiration, praise and power (Kernberg, 1979, Kets de Vries and Miller, 1985). Narcissistic CEOs are less concerned about the well being of other employees when making strategic decisions, which allows them to select the alternative that is strategically most beneficial to achieve firm growth (Kets de Vries and Miller, 1985). Their tendency to ignore employees’ needs, which has been found to negatively influence the CEO narcissism-organizational outcome relationship, is again less detrimental in a fast growth environment as narcissistic CEOs have less trouble making strategic decisions that others may find difficult, such as laying employees off, closing branches and departments and selling companies (Maccoby, 2004). As these decisions are often necessary changes that need to be made to allow organizations to break free from the status quo and to move on, narcissistic CEOs are facilitators of this process (Maccoby, 2004).
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H3: The moderating relationship of EO on the relationship between CEO Narcissism and firm performance is attenuated when the firm’s growth rate is high and accentuated when the firm’s growth rate is low.
Data and Methodology Sample
The sample for this study consisted of Standard and Poor’s (S&P) 500 listed companies from 2014-2017. The S&P 500 are economically and politically well
established companies in the United States. Due to time restrictions and the complex text analysis procedure of retrieving the CEO narcissism and EO variables, it was decided to only use 200 of the 500 companies. This sample was advantageous to the study in that there was a variety of publicly available data on the company’s CEO and financial performance that could be retrieved from online databases. In the data collection
procedure, a variety of databases were utilized, including SeekingAlpha, Orbis, BoardEx and Datastream. After controlling for missing data and the merging of datasets, the final sample consisted of 58 companies and 172 observations.
Measures
All measures used in this study were previously used and are validated by research in existing literature.
CEO Narcissism (IV). To measure CEO Narcissism, an un-obstructive measure was used as first introduced by Raskin and Shaw (1988). They created this method of measuring CEO Narcissism on the research of Sanford (1942) and Weintraub (1981) who found that egocentric and self-centred individuals use more singular pronouns, such as “I” and “Me”, due to their high need to extend themselves. In line with these findings, Raskin and Shaw (1988) proposed that narcissists use more singular pronouns and self-references compared to non-narcissistic individuals due to their exaggerated egocentric orientation. They tested and validated this approach by having a sample of subjects hold a five-minute monologue on a topic of their choosing. This monologue was later
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pronouns by the number of plural pronouns used. A higher ratio of singular to plural pronouns used as an indicator of narcissistic tendencies (Raskin and Shaw, 1988). In this study, the same method was utilized to measure CEO Narcissism. Data in the form of transcripts from quarterly earning conference calls was collected from Seeking Alpha. The purpose of quarterly earnings conference calls is for company executives to discuss the company’s financial performance on a regular basis. They were chosen as appropriate channels to measure CEO narcissism as the regularity of these calls allow narcissists to continuously enhance their self-image by sharing with other executives their
achievements which, they believe ultimately contribute to the company’s success (Larcker and Zakolyukina, 2012).
The DICTION software was used to compute the count of singular and plural pronouns used by CEOs in the quarterly earning conference calls. DICTION is a software program that applies scientific text analysis methods to determine the tone of a verbal message by searching a passage for lexical features (Hart and Carroll, 2014). Through this software, the count of singular and plural pronouns in 500 words was computed. The CEO Narcissism variables, which was later used for the hypothesis testing was computed in STATA, by dividing the singular pronoun count by the plural pronoun count. This method was also successfully utilized in research by among others Chatterjee and Hambrick (2007), Wales et al. (2013), and Engelen et al. (2014).
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company and total assets, then withdrawing total shareholder’s equity and dividing this value by the total assets of the company. These variables were retrieved from Datastream. Entrepreneurial Orientation (Moderator). Entrepreneurial Orientation is the conceptualization as the simultaneous prevalence of proactiveness, risk-taking and innovativeness (Engelen et al., 2016). It was also measured through DICTION text analysis by screening the earning call transcript for 150 words indicating
“innovativeness”, “proactiveness” and “risk-taking” as derived by Short, Broberg, Cogliser, and Brigham (2010)1. The more these indicators are used during the conversation between the CEO and board members, the higher the level of
entrepreneurial orientation in the company. While a low usage, indicates a low level of entrepreneurial orientation (Short et al., 2010). This method of measuring entrepreneurial orientation was first established by Short et al. (2010) and later used and validated by, among others, Engelen et al. (2013) and Wales et al. (2016).
Firm Growth Rate (Contingency Variable). The firm growth rate is
conceptualized as the increase in returns and assets that organizations experience over time. In this study, the percentage increase in sales was computed per year with the following formula as used and validated in Covin, Green and Slevin (2006) and widely in other research:
sales growth = (net sales of prior period – net sales of current period)/ net sales of prior period * 100
Through this equation a yearly growth rate was computed per year per company in this sample. The sales data used to compute this variable was retrieved from Datastream.
Control Variables. This study uses CEO-level, firm-level and environmental-level control variables to reduce variance that may be caused due to interactions of variables that are not directly related to the hypotheses.
CEO-level control variables. The tendency of narcissistic CEOs to make bold and risky decisions in terms of strategy may depend on their tenure. CEOs with higher tenure may have more confidence in their abilities and are less concerned about the potential negative outcomes of their decisions and therefore are more likely to exhibit their
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narcissistic tendencies in the organization (Chatterjee and Hambrick, 2007). This research therefore controls for CEO tenure. The variable was collected from the Orbis database and is operationalized in the form of years that the CEO has held this position at the respective company.
Company-level variables. Older firms have likely developed routines and
methods that allow them to perform their work efficiently. Larger firms on the other hand are in possession of more resources and man-power that likely has a positive effect on their performance. Therefore we control for company age and- size and their influence on performance variance. Company size is operationalized as the number of employees a company holds. This variable was retrieved from Datastream. Company age is
operationalized as the age of integration as retrieved from the Orbis database. This was the closest date available to the foundation year of the company. Another control used is the company’s debt-to-equity. This variable was also available through Datastream. This control variable was selected as it is predicted that entrepreneurial companies whose goal it is to gain a superior market position, are more willing to engage in risk-taking to earn a competitive advantage (Naldi, Nordqvist, Sjöberg and Wiklund, 2007).
Environmental level-factor. This study also controls for industry and year as dummy variables for all the data that was collected. Year dummies are used in this study as the data is longitudinal and therefore it is important to control for the trends in that occurred over the specified time period for the variables used. Due to the reason that the companies included in the sample are part of different industries, it is important to control for any trends that potentially occur across these industries.
Analysis
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mentioned time frame. Fixed effects require responses to be constant across individuals and times, which is not the case in this study (Gelman, 2005). Before the regression, the independent and control variables were standardized for ease of interpretation as they were measured on different scales. By standardizing the variables, it is assured that they all contribute equally to the prediction of outcomes (Kim and Ferree, 1981). To run the respective random-effects regressions, the ‘xtreg’ command in STATA was used.
Results
In Table 1, the descriptive statistics of the variables used in this study are reported. In Table 2 and Table 3 the correlations of the measures between CEO narcissism, Return on Assets (ROA), Tobin’s Q, entrepreneurial orientation (EO) and firm growth are generated. To check for multicollinearity among the variables, the variation inflation factor (VIF) was computed. The results indicate a mean VIF of 1.27, which is below the 4.0 threshold and therefore indicates no multicollinearity to be present among the variables (Alin, 2010). Table 4 displays the outcomes of the random-effects panel data regression on ROA and Table 5 on Tobin’s Q. The standardized correlation coefficients and standard errors of the main- and interaction effects of CEO narcissism, EO and firm growth on ROA and Tobin’s Q are reported. Model 1 shows the control model on ROA and Tobin’s Q respectively, while Model 2 shows the non-hypothesized effect of EO on ROA and Tobin’s Q and the hypothesized effect of CEO narcissism. Model 3 shows the hypothesized interaction effect of CEO narcissism and EO on ROA and Tobin’s Q. Lastly, Model 4 shows the 3-way interaction effect of CEO Narcissism, EO and firm growth on ROA and Tobin’s Q. In the following paragraph, these findings will be elaborated on.
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For hypothesis 1, a linear negative relationship between CEO narcissism and firm performance (Tobin’s Q and ROA) was predicted. The regression analysis resulted in insignificant findings. As for Tobin’s Q, the results found a negative and insignificant relationship between CEO narcissism and the market-based measure (β= -0.008, p>0.1). And for ROA, a positive and insignificant relationship was found (β= 0.341, p>0.1). Based on these findings, no significant relationship between CEO narcissism and firm performance was found and therefore hypothesis 1 could not be supported. However, the relationship between CEO narcissism and Tobin’s Q was aligned with our predictions, that CEO narcissism has a negative impact on firm performance, while the relationship with ROA was not.
In hypothesis 2, EO was predicted to weaken the negative relationship between CEO narcissism and firm performance. For Tobin’s Q, the two-way interaction effect of CEO narcissism and EO was found to be insignificant (β= -0.005, p>0.1), but the direction of the trend is in line with the prediction that EO would weaken the negative relationship of CEO narcissism on firm performance. As for ROA, also an insignificant relationship was found (β= -0.068, p>0.1). The results were not aligned with the
predictions and found EO to strengthen the negative effect of CEO narcissism on ROA. Based on these results, hypothesis 2 is also rejected.
In hypothesis 3, firm growth was predicted to positively enhance the interaction between CEO narcissism and EO to predict superior firm performance. The three-way interaction between CEO narcissism, entrepreneurial orientation and firm growth was found to have a positive, but insignificant effect on Tobin’s Q (β= 55.765, p>0.1) and ROA (β= 86.715, p>0.1). Therefore, hypothesis 3 was also rejected. Firm growth alone was found to have significant positive effect on ROA (β= 4660.401, p<0.01) but not Tobin’s Q (β= 191.343, p>0.1).
A number of control variables of this study were found to have a significant effect on this relationship. CEO tenure was found to significantly negatively predict Tobin’s Q (β= -0.190, p<0.05) and ROA (β= -1.565, p<0.05). Debt to equity was also found to have a significant negative relationship with Tobin’s Q (β= -0.439, p<0.001) and ROA
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To summarize, this study was unable to support the predicted hypothesis but found some variables, including control variables, to significantly predict firm performance.
Graph 1 and 2 provide a visual representation of the hypothesized relationships and the outcomes of this study. Due to the insignificance of the statistical outcomes, no clear trend of direction and relationship is visible in the graphs.
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Insert Table 4, Table 5, Graph 1 and Graph 2 about here ---
Robustness Ad-Hoc Testing
Although the findings of this study resulted in the hypotheses being rejected, a robustness check was performed to test whether the outcomes of the regression analysis change when the interaction of CEO narcissism, EO and firm growth is predicted on other performance measures, to return-on-equity (ROE) and return-on-sales (ROS). These measures are commonly applied variables to evaluate firm performance
(Waldman, Javidan and Varella, 2004). ROE is a measure to indicate the profitability of capital invested by shareholders. It is computed by dividing the yearly net income by shareholder’s equity. A high ROE indicates an effective use of the shareholder’s
investment while a low ROE indicates wasted investment. ROS is a measure to indicate the profitability of sales and is computed by dividing the yearly net income by yearly sales. The outcome of the robustness found the three-way interaction of CEO narcissism, EO and growth rate to significantly negatively predict ROS (β=-33.684, p<0.05). No significant relationship was found in predicting ROE (β=-2107.325, p>0.1).
--- Insert Table 6 and Table 7 about here
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To control for outliers, the variables were winsorized using the ‘winsor2’ command in STATA. This procedure minimizes the impact of outliers by giving replacing the true value by the highest value in the sample that is not considered an outlier. Through this method, the outlier’s impact is reduced but no valuable data gets lost (Salkind, 2010). To check the variables for outliers, a boxplot was drafted per variable, which resulted in the discovery of strong outliers in the CEO narcissism variable. Six observations in the CEO narcissism variable were subsequently reduced to minimize their influence. A regression analysis was performed again with the winsorized CEO
narcissism variable, but the outcomes of the regression were still found to be insignificant.
--- Insert Table 8 and Table 9 about here
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Discussion
This study combined the findings of Engelen et al. (2016), Wales et al. (2013) and Gerstner et al. (2013) to clarify the role EO has in the CEO narcissism- firm performance relationship. It also aimed to extend the findings of organizational contexts that facilitate narcissistic CEOs and tested whether firm growth provides such a context. As the
outcomes of this study are not statistically significant, the hypothesized relationships could not be confirmed. Nonetheless, a number of suggestions can be made and alternative explanations drawn.
In the following paragraphs, the researched relationships will be elaborated on individually and potential reasons for the insignificant results discussed.
CEO Narcissism and Firm Performance
The outcome of this study found no significant relationship between CEO narcissism and firm performance. The direction of trend of the outcomes suggest CEO narcissism to negatively predict Tobin’s Q, but to positively predict ROA in this sample of companies. While this study was unable to provide a more conclusive answer for the direct impact of CEO narcissism on firm performance, the mixed directions of trend could be considered in support of current research that found CEO narcissism to have positive and negative impacts on firm performance (Chatterjee and Hambrick, 2007; Derryberry and Reed, 1994; Patel and Cooper, 2014; Covin and Slevin, 1989; Campbell and Campbell, 2009).
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CEO Narcissism and EO
The outcomes of this study were unable to confirm EO to be a significant
moderator in the CEO narcissism-firm performance relationship. The directional trend of this relationship however, suggests EO to negatively moderate the relationship between CEO narcissism and firm performance (Tobin’s Q and ROA) in this sample.
A potential explanation for this relationship is that the sample of this study consists of exclusively S&P 500 companies, who have been found to be less
entrepreneurially oriented than other companies (Wang, Dass, Arnett and Yu, 2019). In the past decade, many S&P 500 listed companies were rapidly replaced by million-dollar valued start-ups, like Facebook and Netflix. The importance of having to reinvent an organization in this continuously changing era of business is being increasingly
recognized (Bertolini, Duncan and Waldeck, 2015). S&P 500 listed companies have been known to take on a ‘wait-and-see’ mentality with little concern that start-ups could change the industry completely. The fall of Blockbuster after the introduction of Netflix showed that this is a very real concern for organizations to have (Bertolini, Duncan and Waldeck, 2015
Although common narcissistic traits are in line with entrepreneurial
22
CEO Narcissism, EO and Firm Growth
This study did not find the three-way interaction of CEO narcissism, EO and firm growth to be significant. Although a positive direction of trend was found for both ROA and Tobin’s.
This could provide an indication that while EO alone does not lessen the negative effect of CEO narcissism on firm performance, it does when firm growth is high. These findings suggest fast growing and entrepreneurial companies to potentially benefit from narcissistic CEOs. For entrepreneurial companies to successfully grow over a short period of time, it is necessary for them to exploit all growth capabilities of the
organization (Koryak, Mole, Lockett and Hodgkinson, 2015). These capabilities include new product innovation (Freel and Robson, 2004), internationalization (Casson, 1996), and acquisitions (Lockett and Wild, 2013). These capabilities have previously been linked to narcissistic CEOs (Gerstner, 2013; Oesterle, Elosge and Elosge, 2016; Aktas, Bodt, Bollaert and Roll, 2011). Narcissistic CEOs tendency to disregard the well being of subordinates makes difficult decisions often attached to these capabilities easier for them (Kets de Vries and Miller, 1985). The outcomes of this study, while not significant, could therefore point towards firm growth as a potential organizational context where
narcissistic CEOs may benefit firm performance.
One reason for the insignificant findings of this relationship could be attributed to the generally low average growth rate of this study’s sample (µ = 0.108). At an average yearly growth rate of just above ten percent, the companies in this study’s sample cannot be categorized as fast growing firms. While the numbers indicating fast growth diverge per industry, companies with ambitions to grow should have an annual sales increase of 15% to 45% (Flamholtz & Randle, 2012). S&P 500 listed companies are known to be the best economically and financially established companies in the US according to their stock value. There is likelihood that they do not have many ambitions for major firm growth as their market position is well established and competitive as is.
Different results could have emerged if the sample consisted of companies who strongly prioritize firm growth and entrepreneurship, such as platform firms and
re-
23
strategizing to enter two-sided markets (Eisenmann, Parker & Alstyne, 2006). These types of firms require a strong entrepreneurial and innovative outlook to continuously change their strategies to keep up with competition (Eisenmann, Parker, & Alstyne, 2006). A number of businesses experience failure when moving into the two-sided market and transforming into platform firms due to the misfit of strategies used. Executives set strategies based on paradigms and assumptions applied in traditional businesses (Eisenmann, Parker, & Alstyne, 2006). The companies are more likely to strive under CEOs with bold decision-making tendencies and who are willing to think outside the box.
There also exists a strong ‘winner-takes-all’ dynamic in platform firms. This means that one company holds the monopoly in providing a good or service (Eisenmann, Parker & Alstyne, 2006). The stakes for a company are much higher when they provide a monopoly and there is little space for rivals in their networked market (Eisenmann, Parker & Alstyne, 2006). This ‘winner-takes-all’ mentality could be highly attractive to narcissistic CEOs as the monopolizing of a product of services brings the company attention for successfully leaping above competition and securing the product or service as sole providers.
Practical Implications
24
Limitations
Due to restrictions in this study and research setting, limitations occurred. One of the limitations of this study is the restricted sample of listed S&P 500 companies. This sample only includes large companies in the United States (US), therefore the outcomes of this study cannot be generalized to small- and medium sized enterprises (SME) or companies outside the US. Another limitation linked to the sample is the sample size. Due to the complex retrieval method of the CEO narcissism variable, a large quantity of the sample had to be excluded. Of the 200 S&P 500 listed companies that were initially supposed to be sampled, only 58 able to be used for the hypothesis testing, which is only a small percent of all 500 S&P companies. The outcomes of this study can therefore not be generalized onto the other 462 companies.
Another limitation of this study is the CEO narcissism measure. This study only used one of the unconstructive measure methods available, the ratio of singular and plural pronouns used. Additional available methods include: the prominence of the CEOs photograph in annual reports, CEO prominence in press releases, CEO’s relative cash pay and CEO’s relative noncash pay (Chatterjee and Hambrick, 2007). The use of these other methods could have resulted in a more rounded picture of narcissistic CEOs in our sample.
As this study did not control for endogeneity, the direction of the correlation between CEO narcissism and EO is unclear. This means the outcomes of this study are limited in that the direction of influence of the independent variable and moderator on the dependent variable are not confirmed.
Directions for Future Research
25
Another interesting direction for future research would be to test other organizational outcomes of CEO narcissism, rather than firm performance. One interesting aspect to test could be the impact of narcissistic CEOs on strategic change. Strategic change has been closely linked to organizations achieving superior market positions and financial performance (Wiersema and Bantel, 1992). Strategic change was found to be more encouraged when CEOs are highly change oriented and confident in the feasibility of entrepreneurial ventures (Dimov, 2010; Heltaf and Martin, 2014). As these are also characteristics that are representative of narcissists, it would be of value to research to test whether narcissistic CEOs are more likely to introduce and complete strategic changes in their organizations.
And lastly, a qualitative study investigating subordinate’s views and impression of their narcissistic CEO could be of value to research. Narcissistic CEOs are suggested to surround themselves with individuals who are similar in personality as them and who support their cause. But it has never been studied whether this is actually the case and if so, how this one-sided type of personalities impacts organizational outcomes.
Conclusion
26
into how the strengths of narcissistic CEOs can be harvested, it is important to expand on existing research to discover the conditions under which they thrive.
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Appendix 1: Measurement Construct
Construct Measure Source
CEO Narcissism (Raskin and Shaw, 1988) CEOs use of singular and plural pronouns.
Computer-aided analysis of quarterly earning conference calls:
Singular pronouns I, me, my, mine, myself Plural pronouns
We, us, ours, ourselves, our
DICTION 7.0 SeekingAlpha Entrepreneurial Orientation (Short, Broberg, Cogliser & Brigham, 2010)
Computer-aided analysis of quarterly earning conference calls:
ad-lib, adroit, adroitness, adventuresome,
adventurous, anticipate, audacious, bet, bold, bold-spirited, brash, brave, bright-idea, chance, chancy, change, clever, cleverness, conceive, concoct, concoction, concoctive, conjure-up, courageous, create, creation, creative, creativity, creator, danger, dangerous, dare, daredevil, daring, dauntless, dicey, discover, discoverer, discovery, dream, dream-up, enterprising, envisage, envision, expect, expert, exploration, exploratory, explore, fearless, forecast, fore-glimpse, foreknow, foresee, foretell, form, formulation, forwardlooking, frame, framer, freethinker, gamble, genesis, genius, gifted, gutsy, headlong, hit-upon, imagination, imaginative, imagine, improvise, incautious, ingenious,
ingenuity, initiative, initiator, innovate, innovation, inquire, inquiry, inspiration, inspired, intrepid, invent, invented, invention, inventive,
inventiveness, inventor, investigate, investigation, look-into, make-up, mastermind, masterstroke, metamorphose, metamorphosis, neoteric, neoterism, neoterize, new, new-wrinkle, novel, novelty, opportunity-seeking, original, originality, originate, origination, originative, originator, patent, plunge, precarious, proactive, probe, prospect, radical, rash, recast, recasting, reckless, research, resourceful, resourcefulness, restyle, restyling, revolutionize, risk, risky, scrutinization, scrutiny, search, see-things, stake, study, survey, temerity, think-up, trademark, uncertain, venture, venturesome, vision, visionary, visualize, wager
36
Appendix 2: Tables and Figures
Variable Obs Mean Std.Dev. Min Max
Tobin’s Q 172 2.39 1.577 .958 8.173 ROA 172 10.237 9.876 -27.664 44.348 CEO Narcissism 172 .524 .629 0 6.155 EO 172 7.143 4.066 0 22.42 Firm Growth 172 .108 .197 -.296 1.147 Company Age 172 55.906 44.612 4 213 CEO Tenure 172 6.61 5.728 0 23 Debt to Equity 172 80.676 983.835 -11000 3969.14 Company Size 172 127000 109000 4950 454000
Table 1. Descriptive Statistics
Variables (1) (2) (3) (4) (5) (6) (7) (8) (1) ROA 1.000 (2) CEO Narcissism -0.101 1.000 (3) EO 0.034 -0.022 1.000 (4) Firm Growth 0.258 0.040 -0.019 1.000 (5) Company Age -0.072 -0.076 0.215 -0.286 1.000 (6) CEO Tenure -0.125 0.244 0.124 0.188 -0.101 1.000 (7) Company Size 0.054 0.072 0.104 -0.043 0.123 -0.117 1.000 (8) Debt to Equity -0.239 0.010 -0.040 0.061 -0.368 -0.093 0.217 1.000
37 Variables (1) (2) (3) (4) (5) (6) (7) (8) (1) Tobin’s Q 1.000 (2) CEO Narcissism -0.081 1.000 (3) EO -0.007 -0.022 1.000 (4) Firm Growth 0.271 0.040 -0.019 1.000 (5) Company Age -0.071 -0.076 0.215 -0.286 1.000 (6) CEO Tenure -0.012 0.244 0.124 0.188 -0.101 1.000 (7) Company Size -0.078 0.072 0.104 -0.043 0.123 -0.117 1.000 (8) Debt to Equity -0.270 0.010 -0.040 0.061 -0.368 -0.093 0.217 1.000
38
Model 1 Model 2 Model 3 Model 4
Company Age 0.314 0.034 0.441 0.453 (0.99) (1.13) (1.05) (1.04) CEO Tenure -1.565* -1.735* -1.596* -1.497* (0.67) (0.77) (0.72) (0.71) Company Size 0.804 1.137 1.235 1.138 (0.76) (0.85) (0.79) (0.79) Debt to Equity -3.098* -4.286** -4.038** -3.903** (1.35) (1.55) (1.44) (1.42) CEO Narcissism -- 0.341 0.202 -4.088 -- (0.47) (0.52) (6.10)
Entrepreneurial Orientation (EO) -- -0.224 -0.105 -15.301
-- (0.54) (0.50) (7.97)
CEO Narcissism and EO -- -- -0.068 0.742
-- -- (0.36) (6.61)
Firm Growth -- -- 5271.105*** 4660.401***
-- -- (1194.62) (1230.41)
CEO Narcissism and Firm Growth -- -- -- -733.115
-- -- -- (990.31)
EO and Firm Growth -- -- -- -2447.228
-- -- -- (1270.69)
CEO Narcissism, EO and Firm Growth -- -- -- 86.715
-- -- -- (1046.33)
Constant -2.939 -2.926 31.192*** 26.257**
(2.46) (2.57) (8.09) (8.54)
*p<0.05, **p<0.01, ***p<0.01 Notes: Standard Errors in parenthesis; Year and Industry dummies included but not reported.
39
Model 1 Model 2 Model 3 Model 4
Company Age 0.078 -0.02 -0.006 -0.002 (0.12) (0.13) (0.13) (0.13) CEO Tenure -0.190* -0.180* -0.175 -0.180* (0.08) (0.09) (0.09) (0.09) Company Size -0.030 0.044 0.047 0.046 (0.09) (0.10) (0.10) (0.10) Debt to Equity -0.439** -0.631*** -0.622*** -0.627*** (0.16) (0.18) (0.18) (0.18) CEO Narcissism -- -0.008 -0.015 0.485 -- (0.05) (0.06) (0.78)
Entrepreneurial Orientation (EO) -- -0.064 -0.060 0.459
-- (0.06) (0.06) (1.01)
CEO Narcissism and EO -- -- -0.005 0.329
-- -- (0.04) (0.84)
Firm Growth -- -- 171.933 191.343
-- -- (148.90) (156.66)
CEO Narcissism and Firm Growth -- -- -- 84.081
(126.09)
-- -- -- --
EO and Firm Growth -- -- -- 84.742
-- -- -- (161.79)
CEO Narcissism, EO and Firm Growth -- -- -- 55.765 (133.22) -- -- -- Constant 1.126*** 1.061*** 2.173* 2.319* (0.29) (0.29) (1.01) (1.09) *p<0.05, **p<0.01, ***p<0.01 Notes: Standard Errors in parenthesis; Year and Industry dummies included but not reported.
40
Graph 2. Three-way Interaction on ROA
Graph 2. Three-way Interaction on Tobin’s Q -30 -20 -10 0 10 20 30 40 50
Low CEO Narcissism High CEO Narcissism
R etu rn -on -A ss ets (R O A )
(1) High EO, High Firm Growth
(2) High EO, Low Firm Growth
(3) Low EO, High Firm Growth
(4) Low EO, Low Firm Growth -2 0 2 4 6 8 10
Low CEO Narcissism High CEO Narcissism
T
ob
in
's
Q
(1) High EO, High Firm Growth Rate
(2) High EO, Low Firm Growth Rate
(3) Low EO, High Firm Growth Rate
41
Model 1 Model 2 Model 3 Model 4
Company Age -0.014 -0.008 -0.004 -0.007 (0.01) (0.01) (0.01) (0.01) CEO Tenure -0.005 -0.005 -0.005 -0.004 (0.01) (0.01) (0.01) (0.01) Company Size 0.014 0.016 0.018* 0.022* (0.01) (0.01) (0.01) (0.02) Debt to Equity -0.017 -0.022 -0.020 -0.021 (0.02) (0.02) (0.02) (0.18) CEO Narcissism -- 0.009 0.011 -0.158* -- (0.01) (0.01) (0.07)
Entrepreneurial Orientation (EO) -- -0.016* -0.015** 0.086
-- (0.01) (0.01) (0.09)
CEO Narcissism and EO -- -- 0.004 -0.205**
-- -- (0.00) (0.08)
Firm Growth -- -- 52.315*** 57.184***
-- -- (14.08) (14.18)
CEO Narcissism and Firm Growth -- -- -- -28.051*
-- -- -- (11.42)
EO and Firm Growth -- -- -- 15.658
-- -- -- (14.65)
CEO Narcissism, EO and Firm Growth -- -- -- -33.684** -- -- -- (12.06) Constant 0.072* 0.069* 0.409*** 0.454*** (0.03) (0.03) (0.10) (0.10) *p<0.05, **p<0.01, ***p<0.01 Notes: Standard Errors in parenthesis; Year and Industry dummies included but not reported.
42
Model 1 Model 2 Model 3 Model 4
Company Age -25.434 -37.105 -36.197 -35.769 (24.49) (28.40) (28.79) (29.36) CEO Tenure -14.358 -16.561 -16.297 -17.141 (16.58) (19.36) (19.67) (20.03) Company Size 41.354* 47.343* 47.622* 47.783* (18.85) (21.44) (21.74) (22.30) Debt to Equity 220.278*** 199.510*** 200.052*** 199.524*** (33.38) (38.96) (39.37) (39.98) CEO Narcissism -- -5.859 -5.962 42.465 -- (11.67) (14.20) (171.64)
Entrepreneurial Orientation (EO) -- 1.255 1.485 73.170
-- (13.49) (13.73) (224.13)
CEO Narcissism and EO -- -- 0.113 -15.347
-- -- (9.89) (185.90)
Firm Growth -- -- 12114.174 14734.086
-- -- (32758.58) (34614.56)
CEO Narcissism and Firm Growth -- -- -- 7969.335
-- -- -- (27860.05)
EO and Firm Growth -- -- -- 11576.052
-- -- -- (35747.79)
CEO Narcissism, EO and Firm Growth -- -- -- -2107.325 -- -- -- (29435.90) Constant -12.951 -16.435 62.033 81.333 (60.86) (64.44) (221.71) (240.28) *p<0.05, **p<0.01, ***p<0.01 Notes: Standard Errors in parenthesis; Year and Industry dummies included but not reported.
43
ROA Coef. St.Err.
t-value p-value [95% Conf. Interval] Sig CEO Narcissism (winsorized) 0.248 0.454 0.55 0.586 -0.653 1.150 EO -0.154 0.499 -0.31 0.759 -1.143 0.836 Sales Growth 5219.304 1189.408 4.39 0.000 2859.552 7579.055 *** Company Age 0.007 0.023 0.29 0.771 -0.039 0.052 CEO Tennure -0.278 0.123 -2.26 0.026 -0.523 -0.034 ** Company Size 0.000 0.000 1.69 0.094 0.000 0.000 * Debt to Equity -4.103 1.432 -2.87 0.005 -6.944 -1.262 *** Constant 31.617 7.956 3.97 0.000 15.832 47.402 ***
Mean dependent var 9.628 SD dependent var 9.342
R-squared 0.833 Number of obs 145.000
F-test 11.371 Prob > F 0.000
Akaike crit. (AIC) 888.610 Bayesian crit. (BIC) 1022.563 *** p<0.01, ** p<0.05, * p<0.1
44
Tobin’s Q Coef. St.Err. t-value p-value [95% Conf Interval] Sig CEO Narcissism (winsorized) -0.030 0.057 -0.54 0.591 -0.143 0.082 EO -0.056 0.062 -0.91 0.366 -0.180 0.067 Sales Growth 176.935 148.007 1.20 0.235 -116.706 470.576 Company Age 0.000 0.003 -0.01 0.996 -0.006 0.006 CEO Tenure -0.031 0.015 -2.00 0.049 -0.061 0.000 ** Company Size 0.000 0.000 0.45 0.652 0.000 0.000 Debt to Equity -0.616 0.178 -3.46 0.001 -0.969 -0.262 *** Constant 2.385 0.990 2.41 0.018 0.421 4.349 **
Mean dependent var 2.336 SD dependent var 1.553
R-squared 0.907 Number of obs 145.000
F-test 22.076 Prob > F 0.000
Akaike crit. (AIC) 284.264 Bayesian crit. (BIC) 418.217 *** p<0.01, ** p<0.05, * p<0.1
