CEO Power and Risk-taking: Intermediate Role of Personality Traits

Abstract

The authors examine the ways in which different personal characteristics of a CEO under the influence of CEO power may in turn affect personal risk-taking. Agency theory states that managers have non-changing risk preferences and are either risk-averse or risk-neutral. However, there may be cases when managers are risk-seekers, and the power of executives is positively related to excessive risk-taking. Additionally, agency theory assumes that CEOs are homogenous in power use and ignores the difference between CEOs in terms of personality traits, as well as their impact on corporate decisions. Therefore, our aim is to focus specifically on the factors that connect CEO power to CEO risk-taking and to analyze the possible effects of this relationship on a firm. Based on both psychological and managerial studies, we conclude that, on the one hand, a CEO’s power can affect their personal traits by producing [in the case of overconfidence or hubris] or enhancing them [in case of narcissism]. On the other hand, CEOs’ personal traits affect their risk-taking. It can occur either through changing risk perception or due to behavior patterns inherent in those traits. Finally, we hypothesize that CEO power can affect CEO personal risk-taking through personality traits. By examining the relationship between CEO power and CEO risk-taking based on individual-level determinants, our paper adds to the behavioral corporate finance and corporate governance literature.