Influence of CEO Human Capital and Behavioral Characteristics on Economic Profit of Russian Companies

Abstract

We investigate how different personal traits of a chief executive officer (CEO) influence value creation in one of the largest emerging capital markets in Russia. Our research model considers several components of human capital of a CEO. Moreover, we include CEO’s behavioral biases looking at overconfidence measured by industry adjusted ratio of capital expenditures and narcissism captured by the analysis of CEO’s photos following previous academic research approaches. The CEO power is applied to understand its impact over value creation and possible mitigating effect. Our sample consists of 111 Russian publicly traded companies and 235 CEOs for 8 years (from 2013 to 2020). We apply economic profit criteria to measure corporate performance with economic value added (EVA) which captures the spread between actual return on capital derived from financial reports and overall cost of capital based on the risks of a company collected from Bloomberg. We use first-order differences in company’s contribution to EVA after adjustments to the industry and overall market contributions to EVA for the sample. We find empirical evidence that CEO’s human capital affects value creation measured by first-order differences to industry adjusted EVA yearly. Furthermore, the CEO power has positive impact over value creation in Russian corporations while behavioral biases such as overconfidence ad narcissism do not have significant relationship with the changes in EVA.