Narcissistic CEOs: a curse or a blessing?

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Narcissistic CEOs: a curse or a blessing?

The effect of CEO narcissism on firm performance and the moderating role of

annual bonuses

“A little narcissism is good. At least that is what I am telling myself.”

Andy Dunn

Co-founder and former CEO Bonobos Inc.

January 20, 2020 Demi Duursma | S2709562

Supervised by Prof. dr. Pedro de Faria | Co-assessed by Prof. dr. Jordi Surroca MSc BA Strategic Innovation Management | Faculty of Economics and Business

University of Groningen Word count: 19.539

Abstract

Following the upper echelon theory, CEO’s personality traits play an important role in explaining his or her behaviour in decision making and organizational outcomes. Narcissism is identified as

an underlying personality dimension that can influence these strategic decisions. This thesis investigates the effect of CEO narcissism on firm performance and the moderating role of annual

bonuses. A division is made between the effect of CEO narcissism on firm’s financial and firm’s innovation performance. The hypotheses are tested with hand-collected measurements for narcissism and using a panel dataset consisting of US S&P100 companies between 2008 and 2018. The results of this study show that CEO narcissism does indeed have an impact on firm performance and that annual CEO bonus has a negative influence on this relationship. Firms with

a CEO with higher narcissistic traits perform less on both financial and innovation performance, and annual CEO bonuses can strengthen this effect for financial performance. In the end,

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1. Introduction

Research in the strategic management literature has paid increasingly more attention to the critical role senior executives have in decision making and the effect on organisational outcomes (Chatterjee & Hambrick, 2007; Carpenter, Geletkanycz and Sanders, 2004). According to the upper echelons theory, an organisation is seen as "the reflection of its top managers" (Hambrick & Mason, 1984, p. 193). Based on their demographic attributes (gender, tenure, education and so on), experiences and personality, Chief Executive Officers (CEOs) have personalised

interpretations of situations that directly affect their behaviour and choices within their

leadership. According to Hambrick & Mason (1984), especially the CEO's personality traits, play an important role in explaining his or her behaviour. However, most research in the upper

echelon theory focuses on demographics and ignores the personality characteristics that affect the CEO's behaviour. These psychological mechanisms that link CEO personality to strategic influence and performance are still underexplored (Chatterjee and Hambrick, 2007). It is, therefore, necessary to expand the research into the domain of the CEO's personality. The upper echelon literature has identified narcissism as an underlying personality dimension that can influence strategic decisions in the firm (Chatterjee and Hambrick, 2007; Gerstner, König, Enders, & Hambrick, 2013) and it occurs to be a very critical trait in understanding executive leadership (Chatterjee & Hambrick, 2007; Engelen, Neumann, & Schmidt, 2013; Zhu & Chen, 2014). Research into these personality characteristics have shown that narcissists are more likely to emerge as leaders than non-narcissists (Brunell, Gentry, Campbell, Hoffman, Kuhnert and & DeMarree, 2008). Also, the last years, there is an increasing interest in how narcissism influences the way CEO's lead their organisations (Engelen, Neumann, & Schmidt, 2013; Rosenthal & Pittinsky 2006).

Narcissism is part of the so-called 'Dark Triad' personality (consisting of Narcissism, Machiavellianism and Psychopathy) (Paulhus & Williams, 2002) and is characterised by an excessive self-concept, self-admiration, and inflated self-view (Morf & Rhodewalt, 2001;

Resick, Whitman, Weingarden and Hiller, 2009). When discussing about a narcissist, we mean a person with a high degree of narcissistic traits. The concept of narcissists, narcissistic individuals and narcissistic CEOs are all focused on the high degree of narcissistic traits the person in

question has.

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feedback and criticism (Carlson, Vazire, and Oltmanns, 2011; Rhodewalt & Eddings, 2002). They are also charming and more enthusiastic (Goncalo, Flynn, & Kim, 2010) and have a high degree of popularity (Back, Schmukle, & Egloff, 2010) and creativity (Martinsen, Arnulf, Furnham & Lang-Ree, 2019) in comparison with non-narcissistic leaders. Narcissists have the right skills and qualities that made them appear as a leader or to be chosen as a leader, but these qualities do not have to be the recipe for effective leadership and positive firm outcomes in the end.

Narcissistic CEOs are selfish and see themselves as superior with no room for improvement (Raskin, Novacek & Hogan, 1991). Therefore, they do not respond well to criticism (Carlson, Vazire, and Oltmanns, 2011) and feedback (Rhodewalt & Eddings, 2002) and put the blame on others (John and Robins, 1994; Kernis & Sun, 1994) and in the end, they do not learn from earlier mistakes. Because of their overconfidence, they are more likely to strive for bold and daring actions (Campbell et al., 2004) and focus on extreme performance, either big wins or big losses. The narcissistic CEOs self-centred feelings makes their actions and decisions driven by their egoistical needs for power and admiration (Kets de Vries and Miller, 1997) instead of empathetic concern for the firms and organisations they manage (Conger, 1997). Therefore, the objectives of the narcissistic CEO are selfish and not aligned with the ones of the shareholders. Resulting from this, narcissism is usually considered as an undesirable trait when it comes to firm performance.

However, the characteristics of overconfidence and creativity in combination with their strong need for attention makes these narcissistic leaders more desirous of introducing new products (Campbell et al., 2004) because they will increase their status (Judge, LePine & Rich, 2009). Also, it is shown that CEOs that tend to be overconfident are more likely to take their firms into a new technological direction (Galasso & Simcoe, 2017) which will be positively related to the firm's innovation strategy. The narcissistic characteristics such as overconfidence may result in the implementation of new ideas, which is good for innovation but also in over-investments which is negatively related to the firm's financial performance. Therefore, it is essential to make a distinction in the firm performance between different firm performance measures. Drawing on this gap in the literature, I aim to depart from preceding research by studying CEO Narcissism and the influence of this characteristic on the firm's financial performance and firm’s innovation. In line with this goal, this research is guided by the following research question:

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To provide a richer understanding of executive narcissism, this research will also explore the role of CEO compensation in moderating the relationship between CEO narcissism and firm

performance. Research state that key moderators need to be determined to understand the true effects of executive narcissism in organisations (Campbell, Hoffman, Campbell, and Marchisio, 2011). A possible way to enhance the effects of CEO Narcissism on a firm's performance from within the organisation will be with CEO compensation, more specifically, annual CEO bonuses. Narcissistic CEOs need attention and ways to compare themselves with others to feel dominant and superior. Annual bonuses allow for this, the high visibility of annual bonuses of other

executives from publicly traded firm allows for comparison as a confirmation of their superiority which will influence their narcissistic characteristics. Also, when opportunities for

self-enhancement are high, narcissists may perform better (Wallace and Baumeister, 2002), thereby having an indirect effect on firm performance. Using extrinsic motivation such as annual bonuses can enhance creativity (Deci & Ryan, 1996; Eisenberger & Armeil, 1997; Eisenberger & Selbst, 1994) which is by that indirectly related to firm innovation. Whereas previous research mainly considered the direct impact of CEO narcissism, this research would like to explore a possible moderator that can strengthen or diminish the effect of narcissistic leaders on their firm performance. To examine this, the following research question is formed:

RQ2: How does the annual CEO bonus influence the relationship between CEO narcissism and the firm's performance?

With the use of hand-collected data for measurements of CEO narcissism, the hypotheses are tested based on a panel dataset of 140 companies from the US S&P100 over a period from respectively 2008 until 2018 for firm's financial performance and firm's innovation. The data collection is done in cooperation with three fellow master students with whom I collected the data and shared ideas and opinions. The findings of my research suggest that the degree of CEO narcissism is significantly influencing both firm's financial and firm's innovation performance and is thereby contributing to the upper echelon theory literature. Also, annual CEO bonuses are a way to bolster the harmful effects of CEO narcissism on a firm's financial performance and thereby adding a new perspective to the agency theory literature.

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2. Theoretical framework

2.1. Upper echelon theory

The upper echelons theory (UET) developed by Hambrick and Mason (1984) reasons that the upper echelons such as the CEO, are the most powerful individuals in the organisation and therefore have a strong influence on strategic choices and consequently, on organisational outcomes. Hambrick and Mason (1984, p. 193) describe “organisations as the reflection of its

top managers”. They state that top executives “experiences, values and personalities … affect their choices” (Hambrick, 2007, p. 334) “and, through these choices, organisational

performance” (Hambrick & Mason, 1984, p. 197). According to this theory, CEOs act under

conditions of bounded rationality. Executives face situations in organisations that are complex and made up of far more phenomena and information than he or she can grasp within the time frame. Therefore, the CEO makes decisions under bounded rationality because they base their decisions upon their interpretations of the situation. The CEOs experience, personality, values and demographic characteristics drive these interpretations. The UET reasons that CEOs personalised interpretations of the situation directly affect their behaviours and choices on organisational level and with this reason, the organisations are seen as a reflection of its top managers (Hambrick & Mason, 1984).

There is evidence in the literature for the effect of CEO characteristics on firm performance; in particular, much research is done on the effect of demographic characteristics. The reason that researchers have often focused on demographic characteristics of the CEO is that the upper echelon theory suggests researchers to examine “observable managerial characteristics as

indicators” (Hambrick and Mason, 1984, p. 196). Research on demographics is more accessible

than collecting data on cognitive bases and personalities of CEOs. This is because personality data is hard and time-consuming to collect because of the unwillingness of CEOs to cooperate in personality surveys or the possibility that CEOs give socially accepted and desirable answers (Chatterjee and Hambrick, 2007). There is evidence in the literature for the effect of CEO demographic characteristics such as age (Serfling, 2012; Hambrick and Mason, 1984), tenure (Orens and Reheul, 2013), education level (Barker and Mueller, 2002; Rakhmayil and Yuce, 2011) and gender (Khan, Vieito and Paulo, 2013; Faccio, Marchica and Murac, 2012; Davis, Babakus, Englis and Prett, 2010) on firm performance.

However, only focussing on the demographic characteristics of the CEO may provide an

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tenure or education, there is a possibility that the underlying effects of CEO psychological traits such as narcissism on organisational decisions and outcomes are not recognised.

For this reason, focusing only on CEO demographics will rule out the possibility of finding the CEOs psychological traits underneath that affect organisational decisions and outcomes

(Nadkarni & Hermann, 2010). When looking into which psychological traits of the CEO affects organisations, researchers have pointed out that narcissism is important; individuals with a certain degree of narcissistic traits are for example more likely to rise as a leader (Judge et al., 2006; Nevicka, Ten Velden, De Hoogh and Van Vianen, 2011). However, the fact that

narcissistic individuals appear more prevalent in leadership roles (Maccoby, 2000) does not mean that all CEOs are complete narcissists and therefore a certain variance in narcissistic traits is expected, and so a differential effect on firm performance can be noted.

2.2. Narcissism

The upper echelon literature has identified narcissism as an underlying personality dimension that can influence strategic decisions in the firm (Chatterjee and Hambrick, 2007; Gerstner, König, Enders, & Hambrick, 2013) and it occurs to be a very critical trait in understanding executive leadership (Chatterjee & Hambrick, 2007; Engelen, Neumann, & Schmidt, 2013; Zhu & Chen, 2014). Therefore, the focus of this research will be on narcissism to see whether the degree of narcissism plays a role in strategic decisions in the firm. An excessive self-concept, self-admiration and inflated self-view characterise narcissism (Morf & Rhodewalt, 2001; Resick, Whitman, Weingarden and Hiller, 2009) and according to the American Psychiatric Association, Narcissism refers to “a pervasive pattern of grandiosity (in fantasy or behaviour),

need for admiration, and lack of empathy” (2013, p. 669). The term 'narcissism' originated from

the Greek mythology, where a young man called Narcissus fell in love with his reflection in the water. The construct of narcissism has generated substantial interest across the social sciences for many decades (Morf and Rhodewalt, 2001) and is seen as a relatively stable personality trait (Campbell, Bush, Brunell, and Shelton, 2005). In the beginning, narcissism was mostly seen as a categorical phenomenon, where individuals were either normal (absence of narcissism) or abnormal (presence of narcissism). Over the years, this view slowly changed, and after the 1980s, researchers have shown that narcissism is not absolute in a way that you are narcissistic or not. Narcissism is as a personality dimension on which individuals can score a certain degree, so their personality can score from low to high in narcissistic traits (Rijsenbilt and Commandeur, 2013). Narcissism is part of the ‘Dark Triad’ of personality, consisting of narcissism,

Machiavellianism, and psychopathy (Paulhus & Williams, 2002).

Narcissistic individuals think they are special and unique (Emmons, 1984) in such a way that they think that they are more intelligent and physically attractive than they actually are (Gabriel, Critelli, & Ee, 1994). They are characterised by extremely confident feelings about their

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to positive outcomes in life than others (Campbell, Bonacci, Shelton, Exline and Bushman, 2004). With this overconfidence in their success, narcissists have a greater willingness to bet on something because they only believe in a positive outcome. When one only believes in success stories and positive outcomes, betting on something is more attractive because the results will always be favourable according to a narcissist. Because of this feeling of overconfidence and trust in their own abilities, narcissists are bigger risk-takers (Campbell, Goodie and Foster, 2004).

Looking into the social aspect of narcissism, narcissistic characteristics reflect in relationships with other group members. Narcissists are known by their dominance, hostility, and selfishness (Campbell & Foster, 2007). Also, they are seen as insensitive to others (Judge, Piccolo, and Kosalka, 2009), arrogant and disagreeable (Campbell and Miller, 2011). This is the result of their desire to compete with others and dominate them (Caroll, 1987). Narcissists are continuously seeking opportunities to gain attention and praise from others (Carlson, Vazire, and Oltmanns, 2011) and associate themselves with high-status others (Campbell, 1999). While doing this, narcissists are exhibiting their superiority and are reacting aggressively to criticism (Carlson, Vazire, and Oltmanns, 2011). Individuals with narcissistic characteristics do not react well to criticism and therefore reject the negative feedback (Kernis & Sun, 1994), or they put the blame for failure onto others (John and Robins, 1994). Furthermore, narcissists are also seen as

charming and more enthusiastic (Goncalo, Flynn, & Kim, 2010). With their enthusiasm, they are seen as extroverted (Oltmanns, Friedman, Fiedler, & Turkheimer, 2003) and have a high degree of popularity (Back, Schmukle, & Egloff, 2010). Also, Narcissism is positively related to creativity (Martinsen, Arnulf, Furnham & Lang-Ree, 2019) and humour (Back et al., 2010).

2.3. The Narcissistic leader

Narcissists are known for wanting to have power, status while also acquiring and maintaining their self-esteem, this together with their confident feelings of superiority, overconfidence and the little concern for the well-being of others. Which makes them more likely to make an appearance as a leader than non-narcissistic individuals (Brunell, Gentry, Campbell, Hoffman, Kuhnert and & DeMarree, 2008). This is because their selfish personal needs drive narcissists for power and admiration (Kets de Vries and Miller, 1997) instead of empathetic concern for the firms and organisations they manage (Conger, 1997). Even though, narcissists are also seen as social, extraverted, enthusiastic, creative, popular and charming which results in positive first impressions, these qualities do not have to be beneficial for serving as an effective leader. The link between narcissism and leadership has been long under review and is also examined empirically (Ackerman et al., 2011; Emmons, 1984). Campbell, Hoffman, Campbell and Marchisio (2011, p. 275) note that “There are natural links between narcissism and leadership,

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Narcissistic individuals will also emerge as leaders in organisational settings. An organisational setting, such as a company can provide the narcissistic individuals with a position of authority and influence. Having the lead in an organisation can facilitate the achievement of their ambitions, such as their feelings of dominance. As proposed by the upper echelon theory (Hambrick and Mason, 1984), narcissistic leaders will change the needs and interests of the organisation he or she leads (Rosenthal & Pittinsky, 2006) according to their interests which can have possible distinctive effects on companies.

On the one side, narcissistic CEOs are seen as creative, inspirational and up for challenges (O’Reilly, Doer, Caldwell and Chatman, 2013). Also, they come across as assertive, competent (Back, Küfner, Dufner, Gerlach, Rauthmann & Denissen, 2013) are perceived as more

enthusiastic (Goncalo, Flynn, & Kim, 2010) and can easily attract followers (Hogan & Hogan, 2001). Narcissistic leaders are known for sensation seeking (Emmons, 1991)and therefore taking more bold and risky actions (Campbell et al., 2004).

Nevertheless, on the other side, the detrimental effects of narcissistic leadership have also been well documented in the literature (Resick et al., 2009), which makes us wonder whether

narcissistic leaders are in fact, effective leaders. Blair et al. (2008) found that narcissistic leaders create unhappy employees and destructive workplaces which can be the result of their

dominance, hostility and selfishness (Campbell & Foster, 2007). Also, research has shown that narcissistic CEOs are not known to excel in teamwork. The reason behind this destructive teamwork are their feelings of dominance and selfishness, which makes them think only about themselves and believe that their decisions are the best. Because of this, they do not believe they did something wrong and tend to put blame for failure onto others (Campbell et al., 2000) such as their colleagues (John and Robins, 1994) or evaluators (Kernis and Sun, 1994).

Furthermore, narcissistic leaders are shown to inhibit the exchange of information within their organisation (Nevicka, De Hoogh, Van Vianen, Beersma, & McIlwain, 2011). Also, they are more likely to cheat, less likely to engage in prosocial organisational behaviour and are known to violate integrity standards (Blickle, Schlegel, Fassbender, & Klein, 2006). According to

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After all, narcissistic leaders are known by their extroverted personality (Brunell et al. 2008) with feelings of dominance and a strong need for attention (Campbell & Foster, 2007), their overconfidence (Campbell et al., 2004), their tendency to reject feedback and criticism but also because of their creativity (O’Reilly, Doer, Caldwell and Chatman, 2013). These contradicting characteristics of the narcissistic leader, may have a different influence on firm outcomes; do these characteristics influence organisations differently, depending on which firm outcome is measured?

2.4. CEO Narcissism and firm financial performance

Narcissists have the right skills and qualities that made them emerge as a leader (Brunell, Gentry, et al., 2008) or to be chosen as a leader (Nevicka, Ten Velden, De Hoogh, and Van Vianen, 2011), but these qualities do not necessarily have to be beneficial for serving as an effective leader. Better said, narcissism might predict leader emergence, but not automatically a positive firm performance. Existing research about the effect of CEO narcissism on firm performance has resulted in inconsistent findings (Reina, Zhang, & Peterson, 2014). Research shows the positive effects of CEO narcissism (Judge, Piccolo, & Kosalka, 2009; Lubit, 2002; Maccoby, 2004; Rosenthal & Pittinsky, 2006) where Maccoby (2004) says that narcissistic CEOs can lead highly successful companies, he also points out that there is a dark side to narcissism. The negative effects on firm performance show this dark side of narcissism (Chatterjee & Hambrick, 2007; Ham, Seybert and Wang, 2013; Rijsenbilt, 2011 & O'Boyle, Forsyth, Banks, & McDaniel, 2012).

Narcissistic CEOs take unnecessary risks; therefore, the effect of CEO narcissism is detrimental to firm performance (Chatterjee & Hambrick, 2007). Also, Ham and colleagues (Ham, Seybert and Wang, 2013) and Rijsenbilt (2011) find a negative influence between executive narcissism characteristics and firm performance where they point out that CEO narcissism is associated with overinvestments, in particular, research and development and merger and acquisitions

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ideas, which is suitable for innovation but also in over-investments which is negatively related to the firm's financial performance. Therefore, it is essential to make a distinction between different firm performance measures. On the one hand, the narcissistic characteristic of overconfidence might be beneficial for new product ideas and firm innovation, but on the other hand,

overconfidence might result in risky investment projects that will threaten the firm's financial performance. Thus, a division should be made in the effect of CEO Narcissism on firm performance between the firm’s financial performance and the firm’s innovation.

Starting with the effects of CEO Narcissism on the firm's financial performance. Narcissistic CEOs have a strong tendency towards dominance (Raskin, Novacek & Hogan, 1991; Emmons 1987; Ruiz et al. 2001; Back et al. 2013). Dominance is defined by psychologists as deep-seated aggressiveness, a need for power and feelings of superiority (Emmons and McAdams 1991). Because of this dominance, narcissists are more interested in getting ahead than getting along (Paulhus and John, 1998). It is, therefore, that researchers find that narcissists enjoy taking competitive actions more than others do (Morf et al. 2000). Their dominance leads narcissistic CEOs to hunt for a situation where they can control others (Hogan et al. 1990) and it makes them motivated to gain social approval by being better than their associates (Robins et al. 2001;

Campbell et al. 2005). According to Tang and colleagues (Tang, Crossan and Rowe, 2011) CEOs that are dominant tend to have a strategy that is not aligned with the industry central tendency and focus on extreme performance, either big wins or big losses. Part of their dominance is shown in the extroverted personality characteristics. Although this extroversion of narcissistic leaders is initially perceived as charismatic, competent and assertive, these perceptions tend to decrease after a sort of “honeymoon period” (Ong, Roberts, Arthur, Woodman, Akehurst, 2016, p. 237) of leadership. With their extroverted personality (Brunell et al. 2008) narcissistic CEO can also be characterised as the “attention-seeking child” (Rubinstein, 2017, p. 175) who do not have the interpersonal skills to make collaboration work in the organisation, for example, they have unhappy employees (Blair et al., 2008) and inhibit the exchange of information within the organisation (Nevicka, De Hoogh, Van Vianen, Beersma, & McIlwain, 2011). Because of their feelings of dominance, narcissistic CEOs provide a benefit to the self, but at the long-term costs to other individuals. Campbell et al. (2005) hypothesise that these leaders may succeed in the short term, but in the end, they will “destroy the systems that they and others depend on to

survive and thrive” (p. 280). It is therefore that it is suggested that narcissism consists of a “paradoxical set of traits” (Morf & Rhodewalt, 2001, p. 178).

CEOs with narcissistic personalities are known by their feeling of overconfidence (Campbell, Bonacci, Shelton, Exline and Bushma, 2004). Overconfident CEOs have a higher sensitivity in investment cash flows, and they are more likely to engage in value-destroying mergers

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future performance by these leaders are based on performance expectations rather than the actual performance (Campbell, Goodie & Foster, 2004) and they are associated with extremes in the firm performance, which means bigger gains and bigger losses (Chatterjee and Hambrick, 2007) which in the end, will hurt the overall financial performance. Furthermore, narcissistic

executives see themselves as superior with no room for improvement (Raskin, Novacek & Hogan, 1991) therefore they do not respond well to criticism (Carlson, Vazire, and Oltmanns, 2011) and feedback (Rhodewalt & Eddings, 2002) and blame others (John and Robins, 1994; Kernis & Sun, 1994). While feedback to leaders is essential since it will align performance with the overall objectives and missions of an organisation (Sharma & Marandure, 2011).

Looking into the most essential traits of the narcissistic personality compared to non-narcissist; narcissistic leaders are known by their extroverted personality (Brunell et al. 2008) with feelings of dominance and a strong need for attention (Campbell & Foster, 2007), their overconfidence (Campbell et al., 2004), their tendency to reject feedback and criticism but also because of their creativity (O’Reilly, Doer, Caldwell and Chatman, 2013). However, researchers have yet to find a conclusive empirical relationship showing that creativity impacts firm’s financial performance and therefore it is not expected that narcissists’ creativity will lead to either improved or

decreased firm financial performance. However, the narcissist's tendency to control others with their dominance, their strong need for attention and their overconfidence reflect in the company’s financial performance. The overconfidence will tend these CEOs to deliver big wins or big losses (Chatterjee and Hambrick, 2007) and value-destroying mergers (Malmendier and Tate, 2005) detrimental to the firm’s financial performance. Because of the self-centred feelings of the dominant narcissistic leader, they are driven by their egoistical needs for power and admiration (Kets de Vries and Miller, 1997) instead of empathetic concern for the firms and organisations they manage (Conger, 1997). Therefore, the objectives of the CEO are selfish and not aligned with the ones of the shareholders. This will be detrimental for a firm’s financial performance because decisions of the CEO will not be made in such a way that it will be the best for the company. Instead, the decisions will be made based on the CEOs needs for attention and controlling others (Hogan et al. 1990) which will result in unnecessary risks (Chatterjee and Hambrick, 2007). Also, narcissistic CEOs do not respond well to criticism and reject feedback. Therefore, they are not able to learn from earlier mistakes and in the case of significant risks, either over- or under investments or judgement based on wrong predictions, they will not be able to restore this earlier mistakes in the future which will increase the gap between the interests of the shareholders and the CEO and this is negatively related to the financial performance of a firm. It is therefore that, I hypothesise:

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According to the upper echelons theory, the CEO’s attitude towards change will reflect upon the organisation (Hambrick & Mason, 1984), so CEOs are essential for driving firm’s performance and therefore also firm’s innovation. Damanpour and Schneider (2006) argue that when focusing on innovation in organisations, it is not only the differences in demographics of managers that influence decisions but even more important are the effects of managerial attitudes and

psychological characteristics that make a difference in the initiation, decision and

implementation of new ideas in organisations. Therefore, it will be interesting to see whether the degree of CEO narcissism is influencing these new idea initiation and decision-making for firm innovation. However, the critical question asked by Campbell and colleagues in their research (2011) is still unanswered: “Is narcissism good or bad?” (2011, p. 272) or is it possible that there is not one outcome to this question and the characteristics of narcissistic leadership have

different influences on organisations? Narcissistic leaders have compelling visions for their companies and the ability to attract followers. They are creative, overconfident and not afraid to make bold and risky decisions; is this then a recipe for success in firm innovation?

Innovation is essential for growth, survival and success of organisations (Tohidi and Jabbari, 2012). We live in turbulent times where technology is advancing at an ever-increasing pace, markets are constantly changing, and competition moves fast. Therefore, firms need innovation to lead their organisation in the right direction with crisis management and strategic dynamism, introducing new products and business models to adapt to the changing environment. Innovation is the process, and outcomes of firms in developing new products, processes, services, methods of markets and is, therefore “widely regarded as a critical source of competitive advantage” for the firm success and survival (Crossan & Apaydin, 2010, p. 1154). To come up with new ideas and models, creativity in the organisation will be necessary. Innovation is also risky, it is expensive and exposing the firm to higher fluctuations in costs (Simpson, Siguaw & Enz, 2006) because developing new products is expensive, a lot of capital is involved for research and development. Besides that, new product success is uncertain and can result in high developing costs with low sales increase resulting in a decrease in financial performance. Therefore, a certain amount of risk-taking will be essential to fight these uncertainties and still drive the firm to innovation. Since the CEO’s attitude towards change will reflect directly upon the

organisation (Hambrick & Mason, 1984), it is interesting to see whether CEO characteristics are driving innovation.

Narcissistic CEOs suffer from increased self-views, and therefore, they tend to be overconfident (Campbell et al., 2004) which makes them likely to believe in their abilities and be more

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direction (Galasso & Simcoe, 2017). Narcissist believe in themselves and do not hesitate to take risks; therefore, they are more open to new things, such as innovations (Smith & Webster, 2018). Also, they are reported aggressive in adopting new technologies (Gerstner, König, Enders, and Hambrick, 2013) and therefore it is expected that the overconfidence which results in risk-taking of narcissistic CEOs will relate positively to firm’s innovation in such a way that they will put more emphasis on firm innovation than their non-narcissistic counterparts.

From a motivational perspective, new innovative products are not only valuable because of their possible financial returns, but they also contribute to one of the core attributes of narcissism: a strong need for attention (Campbell et al., 2004). New product innovations or innovations that are disruptive and open up thoroughly new markets or use discontinuous technologies allow narcissistic CEOs to gain this attention from their firms’ stakeholders and competitors to distinguish themselves. On the grounds of this, narcissistic CEOs are likely to pursue strategic actions and decisions that will help them to gain this attention and social praise (Resick et al. 2009). A strong motivation for narcissistic CEOs will be to outperform their competitors to get their attention, which is likely to result in a firm strategy with highly competitive aggressiveness being eager to develop and introduce new products. Also, research has shown the positive effect of an extroverted, dominant personality, which narcissists are known for, on firm innovation (Ali, 2019; Hsieh, Hsieh and Wang, 2011).

To introduce new ideas and products, creativity in the organisation will be necessary. According to the upper echelon theory, the CEO will reflect his or her characteristics upon the organisation. So, to increase innovation in a firm, a certain amount of creativity from the CEO will be needed. Guilford (1950) started by defining this concept of creativity as divergent thinking, in other words, thinking in various directions to arrive at several alternative solutions to a problem or concept. Consequently, many approaches are developed to highlight creativity, which is related to developing next-generation products and technologies (von Hippel, 1986), in other words: innovation. Narcissism is positively related to the characteristic of creativity (Martinsen, Arnulf, Furnham & Lang-Ree, 2019) and therefore, narcissistic CEOs are likely to be able to think of various solutions to problems and are more able to develop next-generation products in comparison with their non-narcissistic counterparts.

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Looking into the effect of CEO Narcissism on firm innovation; narcissistic leaders are known by their extroverted personality (Brunell et al. 2008) with feelings of dominance (Campbell & Foster, 2007), their overconfidence (Campbell et al., 2004), their tendency to reject feedback and criticism but also because of their creativity (O’Reilly, Doer, Caldwell and Chatman, 2013) and their intense need for attention. Since innovation is about creating something new, that is not done before; I assume that the fact that narcissistic leaders do not respond well to criticism do not have a direct impact on firm innovation. However, what does have an impact on firm innovation is creativity. Narcissistic CEOs are more creative than their non-narcissistic colleagues which can result in the initiation of more new ideas and methods, which in the end can lead to more and bigger product development. Also, innovation is risky, it is expensive and exposes the firm to higher fluctuations in costs (Simpson, Siguaw & Enz, 2006), the costs of new product development are high and future revenues uncertain. Therefore, a certain amount of risk-taking and dominance is needed; otherwise, no one is daring to take the next step in the firm innovation strategy. Narcissistic leaders have these compelling visions for their companies, and they are overconfident in their own beliefs and decisions which makes them not afraid to take these bold and risky actions that new product development needs. Therefore, overconfidence is seen as positive narcissistic traits related to firm innovation. Additionally, narcissistic leaders are in a strong need of attention. A firm’s strategy that focuses on investing in innovation to

stimulate the introduction of new products can fulfil their strong need for attention. As stated by Hambrick (2007) that top executives' values and personalities affect their choices, one would expect that narcissistic CEOs in need for attention will put more emphasis on firm innovation in their strategic decisions and will, therefore, invest more in research and development. This because their narcissistic characteristics give them intrinsic motivation to develop new products and align the firm strategy to focus more on innovation. Therefore, I hypothesise:

H2: CEO narcissism has a positive effect on firm’s innovation

2.6. Enhancing the effect of CEO Narcissism with CEO compensation

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that are not in line with the interests of the principals. Therefore, the objectives of the narcissistic CEO and the shareholders are mostly not aligned.

One of the possible ways to check for these different interests from the CEO and the owners is to have a trusted partner involved in the decisions; one who challenges and critically questions the ideas, decisions and action plans of the narcissistic leader (Maccoby, 2004). In the companies known as the board of directors, they hire and fire the CEO; they advise and monitor the CEO in such a way to settle for the different interests. The boards of directors have the primary

responsibility over the design of the compensation package for the CEO and in recent decades, the amount of this compensation has increased substantially (Chaudhri, 2003). Because the board of directors has this power to decide over the compensation packages, it can also be used as a mechanism to alter the effect of CEO narcissism on firm performance in a positive manner. This executive compensation plans mostly consist of the following four components: a base salary fee, an annual bonus, stock options and long-term incentive plans (Murphy, 1999). There is a rich body of literature, focusing on the direct relationship between executive compensation and firm performance (Grossman and Hart, 1983; Jensen and Murphy, 1990). This extensive amount of previous studies on the effect of executive rewards systems on firm performance show

inconsistent results.

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bonuses, stock options and long-term incentive plans but since Banker and colleagues argue that it is critical to separate variable pay and the fixed salary when discussing the relationship

between executive pay and firm performance, the focus will be on annual bonuses. The annual bonus is generally a variable compensation that is tied to a performance measurement within the firm, to serve as a motivation tool to enhance firm performance (Grabke-Rundell & Gomez-Mejia, 2002). This variable compensation is also considered as a strategy to attract a desirable and high performing manager (Conyon, 1997).

The direct effect of annual bonuses on firm’s performance is already tested and shows to have a positive effect in some of the cases. However, this research does not focus on the direct effect of annual bonus on firm performance but more to explore the role of CEO compensation in

moderating the relationship between CEO narcissism and firm performance. This because research state that key moderators need to be determined to understand the real effects of executive narcissism in organisations (Campbell, Hoffman, Campbell, and Marchisio, 2011). The narcissistic leaders feelings of dominance (Campbell & Foster, 2007), their overconfidence (Campbell et al., 2004), their tendency to reject feedback and criticism, their creativity (O’Reilly, Doer, Caldwell and Chatman, 2013) and their strong need for attention may not always be in line with the profit-seeking interest of shareholders resulting in higher bets and less positive financial performance. Instead of the positive direct effect that annual CEO bonuses have on firm

performance, is it possible that with the use of bonuses the goals of the narcissistic CEOs will be more aligned with the ones of the shareholders resulting in more favourable firm performance than without the use of annual CEO bonuses?

Narcissistic CEOs are in desperate need of attention and ways to compare themselves with others to feel dominant and superior. Annual bonuses allow for this, the high visibility of compensation levels such as annual bonuses of other executives from publicly traded firm allows for

comparison by the narcissistic CEO with other CEOs as a confirmation of this superiority. Also, researchers Wallace and Baumeister (2002) have shown that in situations in which the

opportunity for self-enhancement is high, narcissists may perform better. With the opportunities for self-enhancement from annual bonuses, CEOs are expected to be more open, listen to other ideas and opinions and decrease their self-centred ways of working which was detrimental for a firm’s financial performance. With the increase of annual bonuses, the objectives of the

narcissistic CEO will be more aligned with the ones of the shareholder, which will be positively related to financial performance. These annual bonuses will then serve as a motivation tool to enhance firm performance (Grabke-Rundell & Gomez-Mejia, 2002) and decrease the negative effect of narcissism on the firm’s financial performance. In short, I hypothesise:

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Besides, the opportunities for self-enhancement were narcissists may perform better (Wallace and Baumeister, 2002), the confirmation of their superiority and the fulfilled need of attention when comparing income with other executives, annual bonuses can also serve as an extrinsic motivation for firm innovation. Moreover, many researchers have proposed that using extrinsic motivation such as annual bonuses can enhance creativity (Deci & Ryan, 1996; Eisenberger & Armeil, 1997; Eisenberger & Selbst,1994) and therefore indirect firm innovation. Which means that, with the use of annual bonuses, the positive effect of CEO narcissism on firm innovation will get bigger, and the difference of the effects between narcissistic and non-narcissistic leaders will grow. Therefore, I hypothesise:

H3b: The annual bonus has a positive moderation effect on the relationship between CEO narcissism and innovation performance in such that the higher the annual bonus, the more positive the relationship between CEO Narcissism and firm innovation

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3. Methods

This section describes and justifies the methodological choices made in this study. First, the sample and the stepwise process of sample selection and data collection is explained. Second, the variables and the corresponding measurement items will be presented and explained. Finally, method of analysis describes the strategy for hypotheses testing and the reliability of this approach

3.1. Sample and Data collection

The sample for this research exists of CEOs from companies of the S&P100 list from the last ten years. The S&P100 index is a stock market index which is a sub-set of the S&P 500 and is maintained by Standard &Poor’s (S&P Dow Jones Indices, 2019). The decision for these

companies is made because of different reasons. First, the S&P100 is based on the top 100 large-cap public companies in the United States (US) and therefore, executive and financial

information is widely available in databases. Second, the firms in the S&P100 are seen as

diverse, stable and from a wide variety of industries. Third, the choice for US companies is based on the fact that the USA is one of the most individualistic countries in the world (Hofstede, 1973) and as a result, it is expected that narcissism plays a significant role in US companies. Also, earlier research from Chatterjee and Hambrick (2007) use a sample from US companies which allows the readers to compare some of their results with the findings in this thesis. Because of the different companies and industries involved in the sample, the results will be generally applicable among a wide variety of industries. Due to time restrictions of the thesis and feasibility of the data collection, I choose to focus on the S&P100 instead of S&P500 or more. The thesis supervisor of this research provided the list of all the firms that appeared in this S&P100 list from the year 2008 until 2018. From this sample with 152 firms, my fellow master students and I started data collection. The data used in this research is secondary data and of quantitative nature and is mainly hand-collected or exported from existing databases. Together a panel dataset was created to test the proposed hypotheses. Some difficulties arose while

collecting data, some years where missing and some companies arose as a spin-off from their mother company which was already included in the sample or companies that went bankrupt. We made notes of these events and accounted for this when finalising the sample. After these

corrections, we completed a final sample of 140 firms.

The data collection started with the collection of the independent variable: CEO Narcissism. Since this variable will be based on secondary data using different measures, including text analysis using the LIWC software, the first step was the collection of all the annual reports. These annual reports are hand-collected from different sources such as the investor relations page on the company website or other specialist archival depositories like

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We choose for annual reports and Form 10-K’s since they stay consistent over time, thereby limiting the variances and allowing to detect changes in CEOs’ personality. In total, we collected 1661 annual reports from 2008 until 2018.

The second step for the independent variable was the collection of the company's earnings conference calls for the text analysis via Thomson Reuters Eikon. For every company from the S&P100 list, there are four earning conference call files per year based on the four quarters in a year. We put a time frame from 1st January 2008 until 1st of March 2019 to include all four quarters from 2008 until 2018 into the sample. The 5078 collected earning conference call transcripts needed to be downloaded manually in the Eikon database. The third step in the data collection for the independent variable was the review of all the earlier collected annual reports to check the picture of the CEO. For this, all the annual reports had to be opened manually to search for the letter of the CEO to shareholders and to check if there was a picture of the CEO available.

The fourth step was the collection of the dependent variables. For the firm’s innovation data I used the UVA Darden Global Corporate Patent Dataset (Dataset (Bena, Ferreira, Matos, and Pires, 2017), which is a dataset that links 3.1 million patents awarded by the U.S. Patent and Trademark Office (USPTO), between 1980 and 2017 from thousands publicly listed firms worldwide. This large dataset then needed to be arranged following the sample of the S&P100 list, where I manually merged the patent data with the different firms and years. The patent count in 2017 strongly decreases in comparison with other years, and this is consistent across all companies. Therefore, I assume that the patent count from 2017 did not cover the full year and needs to be removed from the sample, which results in a dataset on firm innovation from 2008 until 2016. After this, I used the Wharton Research Data services to collect the rest of the data. I downloaded a dataset from COMPUSTAT for the firm’s financial performance and part of the control variables. For the executive compensation and the CEO control variables, EXECUCOMP was used to export a dataset. Appendix A shows a description of all the variables, the calculation and the sources. The final sample from the data collection consists of 1683 observations,

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22 3.2. Measurements

3.2.1. Dependent variable: Firm performance

To measure firms’ financial performance, there are some different indicators possible. However, most used measures are financial performance measures, which can be organised into two different categories: the accounting measures, consisting of return on assets (ROA), return on equity (ROE) and return on investment (ROI) and the market-based measures (e.g. Tobin’s Q). Other studies in this research setting have either used return on assets (ROA) (Chatterjee & Hambrick, 2007; He & Huang, 2011) and/or Tobin’s Q (Ahern & Dittmar, 2012; Rose, 2007) to measure firm’s financial performance.

Therefore, the return on assets (ROA) and Tobin’s Q measure the dependent variable, the firm financial performance in this study. ROA is the primarily accepted and often used accounting measure (Bloom and Milkovich, 1998; Davis, Schoorman, Mayer & Hoontan, 2000) that allows for easier comparison with previous research and is calculated by dividing the operating income before depreciation by total assets.

The measure Tobin’s Q shows the value of a firm from an investor perspective (Wolfe, 2005) and indicates whether management handles the existing firm’s assets properly (Lang, Stulz & Walking, 1989) and is calculated as follows:

!"#$%&_{' ) =}Total assets + Equity market value − Equity book value Total assets

To make the dataset suitable for obtaining regression results, the variables for Tobin's Q and ROA are winsorized at 1% and a 99% level. This is done to make sure that some extreme values do not create unnecessary interference in the regression results.

3.2.2. Dependent variable: Firm Innovation

A firm’s innovation performance can be measured in different ways; most of the common

indicators are R&D inputs, patent citations and patent counts (Hsu, Lien, & Chen, 2013). Patents are, in many cases, a more robust indicator of firm innovation than measures as R&D

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3.2.3. Independent variable: CEO Narcissism

Since narcissism drives people to dominance, power and influence (Kernberg, 1975) it is true that one might anticipate that CEOs will tend to have higher degrees of narcissism than the general population, on average. In this thesis, I expect that CEOs still vary in their degree of narcissism, just as been shown by to other personality dimensions in research (Miller and

Toulouse, 1986; Gupta and Govindarajan, 1984) There may be a few CEOs with a low degree of narcissism and a few CEOs who have exceedingly high levels of narcissistic characteristics, but a variance is expected otherwise. With this variance, it will be possible to test whether it is positive or negative for an organisation to have a narcissistic leader and also, whether the contradicting characteristics of CEO narcissism may have a different effect on firm outcomes such as firm's financial performance and firm innovation.

The Narcissistic Personality Inventory (NPI) measurement developed by Raskin and Hall (1979) and further refined by Emmons (1984,1987) they use for primary data collection via

questionnaires, is not feasible in this project since this research is based upon S&P100 CEOs narcissism scores and these top executives of public companies in the US are mostly unwilling and unreachable to cooperate in these personality surveys which will result in low response rates (Cycyota and Harrison, 2006). Therefore, I decided to use unobtrusive indicators of narcissistic tendencies of CEOs which are measures that do not require the researcher to disturb the research context. Following the lead of Webb and colleagues (1966) who argue that social scientists can use evidence that people leave behind in their physical environment, documentary sources and written and spoken words of subjects as ways to learn about their perceptions and personalities. The data collection for this research is extensive and time-consuming since it consists of

different documentary sources that needed to be manually collected. With this in mind, I decided to base the Narcissism variable on only two different methods following the method of

Chatterjee & Hambrick (2007): the CEO’s use of first-person singular pronouns and the prominence of the CEOs photograph.

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The prominence of the CEOs photograph focuses upon annual reports; here, the CEO gets the opportunity to present him- or herself as the leader. According to Chatterjee and Hambrick (2007), CEOs are very interested in the design of the annual reports, and they do have control over how they are portrayed. Therefore, I expect that a CEO with higher narcissistic traits will seek for a considerable deal of visibility in the annual report to show how important he or she is in comparison with all others in the firm. I rated this indicator following existing research on CEO narcissism (Chatterjee & Hambrick, 2007). Four points if the CEO was portrayed alone and larger than half a page; three points if the CEO was alone and the picture was smaller than half a page; two points if the CEO was portrayed with one or more others and one point if there was no photograph of the CEO in the annual report. Since some of the companies from the sample only filed a Form 10-K where there is no picture of the CEO, which counts as missing data because we cannot make conclusions about narcissism here.

The focus of the independent variable is mainly the text analysis using the earning conference call transcripts and CEO picture scores. The earning conference calls are preferable over annual reports since it will be non-scripted spoken words from the CEO directly to the shareholders, which will be a primary source to test for CEO personality. Also following research of

Chatterjee and Hambrick (2007) the measure for CEO picture is used more often as a measure for CEO narcissism. Therefore, it is an accepted and reliable measure compared to text analysis using annual reports. However, the annual report scores are taken into account and checked for collinearity and internal consistency to form an average narcissism score with all three measures. The measures of narcissism are lagged with one year (t – 1) as I assume that CEO narcissism will affect performance in the subsequent year.

3.3. Moderator variable: Executive compensation

The measure for the moderator is the executive compensation, based on annual bonus in thousands of dollars earned by the named CEO during the fiscal year. Banker and colleagues (Banker, Darrough, Huang and Plehn-Dujowich, 2013) argue that it is critical to separate variable pay for performance and the fixed salary when discussing the relationship between executive pay and firm performance and it is therefore decided to focus on the effects of annual bonus. The data is obtained from the EXECUCOMP database. This data is collected over the year before the focal year (t – 1), as it is assumed that the annual bonus of CEO compensation will affect behaviour in the subsequent year. With the use of lagged variables, the problems of endogeneity with executive compensation and firm performance are partially addressed.

3.4. Control variables

Within this analysis, I control for several variables which have been identified in prior literature as possible influencers of the dependent variables, firm’s financial performance and firm

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characteristics and 3) Industry level. Based on the evidence from previous academic articles, I hold the following variables constant.

3.4.1. CEO Controls

At first, CEO age, tenure and gender are included as control variables, since according to upper echelons theory, these may also affect personal behaviour (Hambrick and Mason, 1984). The first control variable is CEO age. The age of the CEO significantly affects the risk-taking behaviour and firm performance (Serfling, 2013) and is negatively correlated with R&D

expenses (Barker and Mueller, 2002), indicating a lower willingness among older CEOs to take risks and should, therefore, be included as a control variable. Also, the CEO age might affect the level of narcissism due to past successes and experiences in his or her life. These successes will add to the feelings of superiority as they were right before when others maybe had their doubt, and therefore, they will be right in the future again (Maccoby, 2000). Concerning this, is the second control variable, CEO Tenure. The CEO tenure comprises how many years a person has been in the position of CEO, measured on 1st_{of January 2008. This is used as a control since} Miller (1991) found that the longer a CEO is in his or her position, the higher their

risk-averseness and that CEOs with a longer tenure destroy firm value. This because longer-tenured CEOs fail to adapt to changes in the external environment. This is agreed by Barker and Mueller (2002) who found that CEO tenure is negatively associated with a firm’s research and

development expenses. The last CEO control variable is CEO Gender which is measured as a binary variable (1-female, 0-male). This because researchers found that female CEOs are less likely than male CEOs to exhibit narcissistic traits (Ingersoll, Glass, Cook and Olsen, 2017) and that female board members are more risk-averse (Adams and Ferreira 2009).

3.4.2. Firm Controls

Prior research suggests that firm size (Lahiri and Narayanan, 2013) effects firm performance and therefore Firm size is used as a control variable. Firm size is measured by the number of

employees of the focal firm, per year by using a natural logarithm (Feams, Van Looy and

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26 3.4.3. Further Controls

The last control variables are about the industry classification in which a company operates and here I control for Industry diversity. The SIC-code classification is used to differentiate between industries. The four-digit SIC code is encoded into a one-digit SIC code, including 11 different industries. Research has indicated that industry diversity influences firm performance, this

because partners from the same industry are more likely competitors and therefore, the likelihood of learning races and conflict of interest increases (Jiang et al., 2001). Also, the propensity to rely on the patent system and file patents show to be different between some industries (Levin et al. 1987). Multiple dummy variables are created based on the first digit of the SIC-code of the firms. Also, year dummy variables are included to control for variance in the years and pick up any variation in the regression outcomes that happen over time which are not attributed to other explanatory variables.

3.5. Method of analysis

This section describes the used methodology and the motivation for the used estimation models to obtain the regression results.

3.5.1. Panel data

In this thesis, I use panel data analysis because I want to observe the influence of the selected independent variable on a firm’s financial performance and firm innovation performance of multiple firms and thus CEOs over time. The panel data used in this research has various

advantages over using cross-sectional or time-series data. The first one is that panel data models use a combination of cross-sectional and time-series data which enables to estimate more

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27 3.5.2. Fixed and Random effects

Numerous factors affect, for example, the performance of a firm and including all these factors in a regression model will be challenging. A fixed-effect models can control for time-constant unobserved heterogeneity, the omitted variable bias, such as firm and industry attributes that are hard to control for (Greene, 2011). The fixed-effects model allows the unobserved individual effects to be correlated with the included variables in the regressions (Greene, 2011) And even though, the fixed-effects model give statistically consistent results and is seen as the “golden standard” (Schurer and Yong, 2012), it may not always be the most efficient model to use in empirical research (Princeton University Data and Statistical Services, 2007). The model may be problematic and unsuitable if the independent variable, thus the CEO narcissism has little

variation over time within the same firm (Adams, Almeida and Ferreira, 2005). When you include an executive characteristic in the fixed-effects model that has relatively low within-variation, the fixed-effects model may fail to detect significant effects of the CEO characteristic even though they might be present (Zhou, 2001).

Nonetheless, the measurement of CEO narcissism allows for sufficient within variation. A fixed-effects model can still be problematic for some of the control variables that have little within-variation. For this reason, the obtained results for these variables in the fixed-effect models could become insignificant due to small variation across time. Another possible model is the random-effects model. This model uses both within and between individual variation from the panel data set (Schurer and Young, 2012). In comparison with the fixed-effects model, the random-effects model does provide estimates for time-invariant variables such as gender. Bell and colleagues (Bell, Fairbrother and Jones, 2018) argue that in most research settings, a well-specified random-effects model provides everything that a fixed-random-effects model does and even more (Western, 1998; Shor et al., 2007). This can be confirmed by the Hausman specification test (1978) to see if the obtained estimates from the fixed- and the random-effects give significantly different

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28 3.5.3. Analytical method

To test the hypotheses, I use the statistical software STATA. Here the panel data set which is based on the combination of the company ticker and the year is used to test the effect of CEO narcissism on a firm’s financial performance and firm innovation performance. This research uses two dependent variables, and therefore, two samples are set, one for the financial

performance and one for the firm innovation. After the final samples are created, the descriptive statistics are measured to display the means, standard deviations, minimum, maximum values and correlations between the variables.

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4. Results

This chapter presents the results of the statistical analysis. It starts with the descriptive statistics and continues with the results of the regressions for hypotheses testing.

4.1. Descriptive statistics and correlations

The data collection on CEO Narcissism and firm performance resulted in 1683 observations. Table 1 and Table 2 present the descriptive statistics of the two dependent variables (firm’s financial performance and firm innovation), the independent (Level of CEO Narcissism), the control variables and thereby covering the sample sizes, means, standard deviations, minimum and maximum values per variable. The two tables result from the decision to form two different samples from the overall sample, one for the firm’s financial performance and one for firm’s innovation. The reason for this is that our data set is an unbalanced panel data set; not all

observations are complete for all of the years in the sample. For firm innovation, patents awarded could only be collected from the years 2008 until 2016 for example and using that sample also for the firm’s financial performance will result in a data loss for the other years. This results in a sample of 782 observations for the firm’s financial performance and a smaller sample of 621 observations for firm innovation. The mean for the level of CEO narcissism is comparable in both samples; earning conference calls (0,17), annual reports (0,07) and CEO picture (2,66 and 2,61). However, when looking at the measure of Average CEO Narcissism in both samples, which is the average of the standardised measures of the earnings conference calls and annual reports text analysis data and the score of the CEO picture, a negative mean appears. Since the level of narcissism cannot be negative, and the internal consistency between the three measures is very low (Cronbach’s alpha = 0,05), I decided to mainly focus the independent variable on the most reliable sources of information: earning conference calls and CEO Picture. Looking into the descriptive statistics for the CEO, the average age of the CEO’s is 57, with a minimum of 43 and a maximum depending on the sample of 75 or 77 years. Also, CEOs have on average a tenure of around six years, with a minimum of 1 and a maximum of 34 years which makes it possible to test the influence of CEO narcissism on the firm’s performance. With a mean of 0,06 and 0,07 for CEO gender (1-female, 0-male), it shows that most of the CEOs in our sample are male. In the sample, the mean for patents awarded is around 256 patents, with a minimum of zero and a maximum of 3210 patents awarded to a company in one year. The distribution of patents count is skewed to the left which aligns with prior patent research as it indicates that most of the

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Also, in Table 1 and Table 2, the correlations are presented. There are some things noteworthy in both correlation matrix, starting with Table 1 for the financial performance sample. There are high correlations (r > 0,5) between the average level of narcissism and the three measures for narcissism. However, because of the negative mean and the low Cronbach’s alpha, the average measure for narcissism will not be involved in the hypotheses testing. Furthermore, there is a fascinating negative correlation between annual CEO bonus and ROA (r = -0,23) and Tobin’s Q (r= - 0,15) but also a positive correlation between the annual bonus and CEO narcissism in earning conference calls (r= 0,26). In the innovation sample in Table 2, there is a significant correlation (0,3) between firm’s R&D intensity and patents awarded which shows the importance of internal R&D in the development of innovation (Cohen and Levinthal, 1990). Except for the correlations between the measures of narcissism and the average and a logical correlation between ROA and Tobin’s Q, there are no high correlations observed (r < 0,55) in the two samples. Even though none of the correlations in the matrix surpass the cut-off value of 0.7, a Variance Inflation Factors (VIF) test is done to check the samples for multicollinearity (see appendix B). The mean VIF is 1.41 in both samples, and the average narcissism is exhibiting the highest VIF value (2,72 and 2,64) but since it is decided not to take this measure into account for the hypotheses testing it will not cause any problems. All VIF values are below the rule-of-thumb cut-off value of 10 and all the tolerance numbers are above 0.10, so we can conclude that there are no high correlations among the predictor variables and no problems with

Narcissistic CEOs: a curse or a blessing?