The Effects of CEO Personality on Strategic Change and Firm Risk

Abstract

We extend upper echelons research by examining how chief executive officers’ (CEOs’) “Big Five” personality traits (i.e., extraversion, conscientiousness, openness to experience, agreeableness, and neuroticism) affect strategic change and firm risk. To do this, we develop and validate a novel, unobtrusive, language-based measures of the CEO’s Big Five personality traits, which allows us to test our current hypotheses as well as provide a strong foundation for future research on CEO personality. Using a sample of more than 3,000 CEOs of S&P 1500 firms, we find that CEOs’ personalities have both direct and interactive effects on their firms’ propensity towards strategic change and market perceptions of firm risk. Specifically, we find that CEO openness is positively related, while conscientiousness and agreeableness are negatively related to strategic change. We also find that CEO extraversion and neuroticism are positively related, while conscientiousness is negatively related to the perceived riskiness of the firm. In addition, we also find evidence that certain traits also moderate the influence that two antecedents of strategic change and firm risk, namely poor firm performance and the CEO’s compensation risk, have on these two outcomes. We find that CEO openness attenuates, while conscientiousness and agreeableness amplify the positive relationship between poor performance and change, whereas high conscientiousness attenuates the positive relationship between compensation risk and firm risk.