CEO narcissism in M&A decision-making and its impact on firm performance

Abstract

Using a large sample of about 1,900 M&A deals from 1993 to 2005, and data on more than 3,100 CEOs, I explore merger and acquisition activities from a psychological perspective, and provide another explanation for M&A motives and associated firm stock performance. Specifically, I empirically test if highly narcissistic CEOs are more likely to conduct mergers or acquisitions than lowly narcissistic CEOs. I also examine the impact of high level of CEO narcissism on the market reaction to firm M&A announcements, and also long run post-M&A stock returns. In addition, I empirically investigate the impact of the parallel CEO narcissistic tendency of target firm on acquiring firm M&A performance. Three proxies for CEO narcissism are used in this study: Holder67, a CEO option exercise-based measure, CEO media portrayal, and a third new measure based on the formal content analysis of actual CEO speech. I find empirical evidence that CEOs with high level of narcissism are more likely to conduct mergers and acquisitions than other CEOs. My results also suggest that a high level of acquiring firm CEO narcissism has a significantly negative impact on acquiring firm short run M&A performance. Post-acquisition, I find that deals conducted by highly narcissistic CEOs significantly underperform those by lowly narcissistic CEOs. Moreover, my results show that a high level of target firm CEO narcissism similarly negatively affects acquiring firm short run M&A performance. In an additional analysis, I find that the positive link between CEO narcissism and the likelihood of a CEO conducting an M&A deal is stronger and the impact of CEO narcissism on firm M&A performance is more negative in large firms than that in smaller firms. My results also show that the negative impact of CEO narcissism on firm short run M&A performance is strongest when both acquiring firm and target firm CEO narcissism coexist concurrently. However, I find that the level of CEO narcissism is negatively associated with the quality of corporate governance, and the positive link between CEO narcissism and the likelihood of a CEO conducting an M&A deal is weaker in firms with good corporate governance than that in firms with poorer corporate governance, which may suggest that effective corporate governance mechanisms might play positive roles in curbing CEO narcissistic tendencies and in helping to ameliorate, to some extent, the adverse impact of high level of CEO narcissism on firm M&A decision making.