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Imagine a slightly unpleasant CEO. They are self-centered, lack consideration for others, and seek praise. They use company announcements as hobby training, peppering every conference call with references to themselves.
Now imagine their company is doing well. Sales are up, earnings expectations are rising, long-term investors are happy, and sentiment is positive. Then, out of nowhere, this asshole CEO sold his stock. What does it mean?
That’s the question posed by a paper published this month in the Journal of Corporate Finance, titled “CEO Narcissism and Opportunistic Insider Trading.” The author considers two possibilities. There is an “exaggerated ego hypothesis” where CEOs overestimate the importance of non-public information and speak bluntly about the potential legal implications. Then there’s the “reputation protection hypothesis,” which holds that a CEO’s vanity succumbs to greed.
Option 2 makes sense. Confidence and charisma come naturally to narcissists, but the perception of integrity must be earned. A self-aware narcissistic CEO prioritizes public image, reputation, and career advancement potential, so he avoids anything that looks dangerous. Therefore, even if they are trading opportunistically, it is likely to be incidental and the non-public information on which they acted will prove to be material.
Unfortunately, that’s option 1. Narcissistic CEOs often make legally questionable trades, and their trades are less informative about future stock performance, the study concludes.
“We found that CEOs with higher levels of narcissism engage in more intense opportunistic insider trading,” said lead author Chen Jiang of Boston University. ‘s lead author Chen Jiang from Boston University told FT Alphaville. “The effect of CEO narcissism on opportunistic insider trading is also greater among CEOs who have limited legal knowledge, have weaker external and internal monitoring pressures, work for large companies, and are male. It was also found to be significant.
This method scores CEOs’ narcissism based on the number of first-person pronouns they use in the question-and-answer section of earnings calls, and then backtests their total compensation compared to higher-paid executives. A CEO is marked as a narcissist if his or her narcissism score exceeds the annual median within the same industry.
The study focuses on insider sales because CEOs are compensated in stock and therefore rarely need to buy on the open market. If a CEO’s sale does not occur in the same month for three consecutive years, it is classified as opportunistic.
It shows that there is a clear correlation between self-interest and the propensity to engage in risky business, with a one-unit increase in a CEO’s narcissism score associated with an increase in the strength of his or her opportunism (sales relative to total holdings). amount) corresponds to an increase of 48.2 percentage points. ). Approximately 38% of stock trades by narcissistic CEOs are classified as opportunistic, compared to 32% by the remaining CEOs.
Ego-driven risk trading is an exclusively male activity, and the paper found no link between narcissism and opportunism among female CEOs. The authors suggest that this is also unique to large companies, perhaps because “large companies have a larger number of board members and executives, which provides greater coverage for CEOs’ insider trading activities.”
The study found that opportunism was less pronounced among narcissistic CEOs with law degrees and CEOs who worked with influential general counsel. The presence of blockholders in the investor base increases the range of analysts, and the gender diversity of the board becomes more vigilant as well.
Suppression is about protecting the narcissist from himself. The researchers found that opportunistic long-short portfolios of conceited CEOs produced adjusted abnormal returns of -0.15% per month. A passive CEO’s long-short portfolio has a monthly return of 1.42%. The annualized difference is 17.3%.
Business influencers agree that ego is a double-edged sword. Previous research has found that narcissistic CEOs are more likely to pursue transformational M&A and pivot strategies, which lead to superior performance on several criteria. Evidence also suggests that they care less than average about product safety, CSR and workplace bullying, and are more willing to avoid taxes, making their companies more vulnerable to lawsuits. Masu.
By focusing on insider trading, Jiang et al. add the useful detail that narcissistic CEOs tend to take unnecessary risks in order to ultimately reap overwhelming profits. It seems that they either lack self-awareness or are simply unable to help themselves.
