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, we explore merger and acquisition activities from a psychological perspective, and provide another explanation of M&A motives and associated firm stock performance. We empirically test if highly narcissistic CEOs are more likely to conduct mergers than lowly narcissistic CEOs. We also examine the impact of CEO narcissistic personality on market reaction to firm M&A announcements, and also long-term post-M&A stock returns. Three proxies for CEO narcissism are used in this study: Holder 67, a CEO option exercise-based measure, CEO media portrayal, and a third measure based on formal content analysis of actual CEO speech. Our results demonstrate that highly narcissistic CEOs are almost 40% more likely to conduct mergers and acquisitions than lowly narcissistic CEOs. Our results also suggest that the degree of acquiring firm CEO narcissism has a significantly negative impact on both short-run and long-run post-M&A returns. We find that, the market reacts more negatively to M&A deals conducted by highly narcissistic CEOs than lowly narcissistic CEOs in the [-1, 1] three-day event window by between 0.9% and 1.5%. Post-acquisition, we find that deals conducted by highly narcissistic CEOs significantly underperform those by lowly narcissistic CEOs in the [1, 24] month event window by between -1.7% and -2.4%. In addition, our results show that target firm CEO narcissism similarly negatively affects acquiring firm short-term performance. However, we find that effective corporate governance mechanisms ameliorate, to some extent, the adverse impact of high levels of CEO narcissism on firm value in M&A deals.