The Acquisitive Nature of Extraverted CEOs

Abstract

This study examines how extraversion, a personality trait that signifies more or less positive affect, assertive behavior, decisive thinking, and desires for social engagement, influences chief executive officers' (CEOs') decisions and the ensuing strategic behavior of firms. Using a novel linguistic technique to assess personality from unscripted text spoken by 2,381 CEOs of S&P 1500 firms over ten years, we show that CEOs' extraversion influences the merger and acquisition (M&A) behavior of firms above and beyond other well-established personality traits. We find that extraverted CEOs are more likely to engage in acquisitions, and to conduct larger ones, than other CEOs and that these effects are partially explained by their higher representation on boards of other firms. Moreover, we find that the acquisitive nature of extraverted CEOs reveals itself particularly in so-called ''weaker'' situations, in which CEOs enjoy considerable discretion to behave in ways akin to their personality traits. Subsequent analyses show that extraverted CEOs are also more likely than other CEOs to succeed in M&As, as reflected by stronger abnormal returns following acquisition announcements. Keywords: personality, chief executive officers, mergers and acquisitions, extraversionThe personalities of chief executive officers (CEOs) affect not only their own individual behavior but also the behavior of the firms they lead (e.g., Hambrick and Mason, 1984;Hiller and Hambrick, 2005). A dominant area in the field of strategic management focuses on the role of top executives in consequential strategic choices, such as engaging in mergers and acquisitions (M&As). For CEOs, the choice to acquire involves many decisions, such as whether, what, when, and for how much to acquire. As outcomes are highly uncertain and ambiguous, and opportunity costs are difficult to determine, there is considerable room for subjective influences in the form of personal preferences, biases,

CEO equity risk bearing and strategic risk taking: The moderating effect of CEO personality

“…Similarly, Peterson et al (2003) illustrate how CEO personality influences top management team dynamics. More importantly, these studies suggest that the five-factor model may indeed explain individual differences in risk perceptions (see also Malhotra, Reus, Zhu, & Roelofsen, 2018). Second, the five-factor model is strongly established as a pillar of personality psychology research (e.g., Digman, 1990) because it efficiently describes a unique set of personality traits that drives individual's behaviors (Boudreau et al, 2001).…”

“…Given gain outcomes are more salient for extraverted individuals, they are likely to perceive lower risk. This, for example, is reflected by their propensity to pursue strategies that are considered to be particularly challenging (Bono & Judge, 2004;Malhotra et al, 2018). Similarly, extravert CEOs show greater willingness to challenge the status quo and are thus more likely to initiate strategic change (Herrmann & Nadkarni, 2014).…”

The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias

“…However, when it comes to leadership quality, research shows an augmented role of extraversion. Extraverts are able to generate confidence among others not just because of their overconfidence but also because of their positive emotionality and social dominance (Bono and Judge, 2004;Malhotra, Reus, Zhu and Roelofson, 2018). As overconfidence in Kramer and Liao (2016) is mainly observed via bold statements and forecasts of the CEO, it may affect analyst forecasts more directly.…”

“…However, other studies suggest performance benefits from an extraverted CEO via higher strategic flexibility or better management team integration (Nadkarni and Herrmann, 2010;Araujo-Cabrera, Suarez-Acosta and Aguiar-Quintana, 2017). It has also been shown that extraverted CEOs are more likely to succeed in acquisitions (Malhotra, Reus, Zhu and Roelofson, 2018).…”

Viceroys or Emperors? An Institution‐Based Perspective on Merger and Acquisition Prevalence and Shareholder Value

“…First, the notion that the viceroy problem is at least partially context‐dependent has an important bearing on M&A research. For example, prior research has made a strong case that managers vary considerably in their approach to M&A decisions, contingent on hubris (Hayward and Hambrick, ) or narcissism and other personality dimensions (e.g., Chatterjee and Hambrick, ; Malhotra et al, ). Our study suggests that the institutional context may not only influence the extent to which CEOs can pursue self‐interests, it can also restrain CEOs in terms of flexibility or speed in decision‐making.…”