Executive Personality, Capability Cues, and Risk Taking

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.