Too Negative to Take Risks? The Effect of the CEO's Emotional Traits on Firm Risk

Abstract

Except for some recent survey and experimental studies, strategic management research has tended to neglect the influence of emotions on managers' strategic choices. This paper analyses the influence of the stable, long-term emotional traits of CEOs on an actual business outcome: risk taking. The hypotheses are tested on a sample of 51 Spanish banks and savings banks. Our results show that CEO affective traits influence banks' risk taking. Specifically, our analyses show that managers' negative affective traits are related to lower risk taking as reflected in a lower variability in performance, a lower level of credit risk and a less risky composition of the loan portfolios of the banks they manage. Positive affective traits do not seem to influence the level of risk. These findings partially support 'affect congruency and generalization' arguments, and show the need to consider the role of affects when analysing CEOs' strategic choices.

Banks’ Risk Endogenous to Strategic Management Choices

“…The banking industry is a good example of the importance of the endogeneity of risk in the strategic choices of bank managers (Delgado‐García, de la Fuente‐Sabaté and de Quevedo‐Puente, ; Elsinger, Lehar and Summer, ). Consider a bank manager who seeks to maximize profits by taking risks with respect to the bank's loan portfolio.…”

Corporate governance and firm risk

“…However, limited prior research shows that certain attributes of corporate governance are linked to the variability in performance, or firm risk. These studies are typically based on US samples in the financial sector (Pathan, 2009;Llewellyn and Muller-Kahle, 2012) and/or involve only a limited set of board attributes such as board size, independence, CEO power and board equity ownership (Brick and Chidambaran, 2008;Cheng, 2008;Delgado-García et al, 2010;Geppert et al, 2013) rather than an overall governance index.…”

Introduction: The Import of Intrapersonal and Interpersonal Dynamics in Work Performance

“…The authors suggest that for group tasks necessitating thorough elaboration of new information, managers may wish to create teams composed of members with moderately high levels of negative affectivity. The findings of Delgado-Garcı´a, de la Fuente-Sabate´and de Quevedo-Puente (2010) are no less significant in terms of their implications for managers, however. In the current economic climate, created by banks and financial institutions that were the opposite of risk-averse, CEOs who are higher in negative affectivity, who thus engage in greater information processing and are more open and attentive to new information, and who consequently take on lower levels of risk, are likely to be recognized and valued to a much greater degree than may have been the case several years ago.…”

“…van der Flier, 2010a, 2010b) and macro (e.g. Delgado-Garcı´a, de la Fuente-Sabate´and de Quevedo-Puente, 2010;Fink and Kessler, 2010;Haslam et al, 2010). Both task performance (e.g.…”