Executive Personality, Capability Cues, and Risk Taking

TLDR

The study investigates how CEO risk taking is shaped by contextual capability cues and narcissistic traits, hypothesizing that narcissistic CEOs respond differently to objective performance signals versus social praise. Using an interactionist framework, the authors define capability cues, posit differential responses of narcissistic CEOs, and test these hypotheses in two empirical studies of risky outlays (1992–2006) and acquisition premiums (2001–2008). Results show that capability cues influence risk taking overall, but highly narcissistic CEOs are less responsive to objective performance and are markedly emboldened by social praise.

Abstract

We adopt an interactionist logic to study the determinants of risk taking by chief executive officers (CEOs). We introduce the concept of “capability cues”—contextual signals that decision makers might reasonably interpret as indicators of their current level of overall ability—arguing that positive cues will induce boldness, while negative cues will induce timidity. Then, drawing from prior theory about how narcissists react to stimuli, we hypothesize that highly narcissistic CEOs will be relatively unresponsive to objective indicators of their performance; in contrast, highly narcissistic CEOs will be exceptionally emboldened by social praise (in the forms of media praise and media awards). We test our theory in two distinct studies, one of risky outlays by CEOs of publicly owned U.S. companies from 1992 to 2006, and a second of acquisition premiums paid by CEOs of a sample of U.S. acquiring firms, 2001–2008. Our analyses show that capability cues generally influence executive risk taking, but highly narcissistic CEOs are much less responsive to recent objective performance than their less narcissistic peers; in contrast, highly narcissistic CEOs are especially bolstered by social praise.