Narcissistic CEOs' dilemma: The trade‐off between exploration and exploitation and the moderating role of performance feedback

Abstract

AbstractPrior research has established a positive link between chief executive officer (CEO) narcissism and firm innovation. Notably, research shows that CEO narcissism is positively related to more radical innovation and breakthrough technologies, that is, manifestations of a firm's exploration orientation, and positively related to more incremental innovation, that is, manifestations of firms' exploitation orientations. However, it primarily examines these orientations in isolation or neglects their interplay and thereby ignores insights from organizational learning theorists that firms and managers face decisive trade‐offs between fundamentally distinct exploration and exploitation orientations. This overlooks the possibility that narcissistic CEOs may emphasize exploration over exploitation, and vice versa, to gain visibility, affecting the balance between those orientations. Consequently, we might draw incorrect conclusions about how CEO narcissism affects firms' innovation. Drawing on theoretical mechanisms from the narcissistic personality literature, we develop and test a competing logic that connects CEO narcissism with firms' relative exploration orientation, that is, firms' exploration relative to the exploitation orientation. In addition, we theorize on and investigate the moderating effects of accounting‐ and market‐based performance feedback that may alter narcissistic CEOs' attention to exploration or exploitation and, hence, affect the relationship with firms' relative exploration orientation. We test our hypotheses using panel data from 120 firms in the Standard and Poor's 100 index between 2008 and 2018, covering the personality profiles of 224 CEOs. Our findings indicate that CEO narcissism is negatively associated with firms' relative exploration orientation, that is, narcissistic CEOs emphasize an exploitation orientation. Furthermore, this relationship is pronounced with firms' increasing relative accounting‐based performance and attenuated with firms' increasing relative market‐based performance. We draw theoretical and managerial implications from these insights.