Narcissism at the top: the influence of CEO psychology on hedging strategies in the oil & gas industry.

November 13, 2023 5 min read

The interaction between the psychology of business leaders and risk management strategies is a topic that is gaining increasing attention in academia. The study conducted by Emanuele Bajo (University of Bologna), Håkan Jankensgård (University of Lund) and Nicoletta Marinelli (University of Macerata), addresses the issue with a rigorous methodology, starting with empirical data, providing significant insights into the understanding of corporate behavior in relation to the psychological characteristics of leaders. The theoretical framework is that of Upper Echelons Theory, which argues, in a nutshell, that corporate policies are shaped precisely by the characteristics of its key decision makers. In particular, the study examines the role of narcissism, a psychological trait characterized by an exaggerated sense of one’s own worth and an incessant need for admiration, in the behavior of CEOs. The objective is to highlight how this trait may influence corporate decisions regarding the adoption of selective hedging, an approach that modulates the extent and timing of financial hedging in response to market dynamics.

Within the context of this theoretical framework, the research team developed two key hypotheses:

  • ●Hypothesis 1: Narcissistic CEOs are associated with greater selective hedging. 
  • ●Hypothesis 2: Following an adverse event, companies with a CEO with narcissistic traits reduce their selective hedging comparatively more than companies led by CEOs without narcissistic traits.

The second hypothesis is based on the so-called “narcissistic paradox”: while under normal conditions these people score high in self-esteem and grandiosity, under adverse conditions they turn out to be fragile, with a low self-esteem and prone to crumbling. This goes to refute the idea, held in other contexts, that executives with narcissistic traits are better suited for decision-making in times of crisis because they are supported by a strong self-esteem and considerable decision-making skills.

The analysis considers a sample of 920 observations, corresponding to 83 individual companies in the U.S. oil & gas industry, between the first quarter of 2013 and the second quarter of 2016. These companies were selected based on well-defined criteria, including that of a minimum of $1 million in total assets and sufficient data on their derivatives. CEOs’ narcissism was measured through linguistic analysis of the companies’ earnings call transcripts, focusing on the use of first-person singular pronouns (such as “I,” “my,” “me”) relative to the total number of first-person pronouns used. This method has been validated by previous studies and has also proven valid when controlled for other socio-demographic characteristics and personality traits. The study sample includes 3,284 documents from 126 CEOs. The analysis focuses on the “Questions and Answers” section of earnings calls, where narcissistic attitudes are most likely to emerge. Natural language analysis tools were used to identify pronouns and calculate the narcissism score. Selective hedging was calculated following a specific definition, which takes into account variables such as hedge ratio and expected production. The empirical model used to test the effect of CEO narcissism on selective hedging also considered variables such as firm size and leverage as controls. The average narcissism score among CEOs was 0.20, while the average selective hedging was 0.16.

One of the most striking findings is that 92 percent of CEOs in the sample talked about hedging during earnings calls, emphasizing their direct involvement in hedging decisions. This finding is particularly relevant because it shows that hedging is not a decision delegated to lower hierarchical levels but that it is a strategy that directly involves the top management. In addition, the study found that companies with narcissistic CEOs practice selective hedging more frequently, thus validating the first hypothesis. This behavior was further examined in the context of an adverse event, such as the oil price collapse in 2014. Surprisingly, companies with narcissistic CEOs reduced their selective hedging more significantly than other companies, consistent with the “narcissistic paradox,” thus also confirming the second hypothesis.

These results were subjected to numerous robustness tests, which confirmed the validity of the conclusions. For example, the analysis ruled out the possibility that CEO narcissism could simply be a proxy for overconfidence, another psychological trait that could influence hedging decisions. In fact, the correlation between narcissism and overconfidence was found to be only -0.03, which is not statistically different from zero. The implications of these results are profound, especially for companies seeking to evaluate and improve risk management strategies, with a special focus on phases of economic crisis or adversity in the industry. This study thus breaks new ground in the analysis of firms’ financial strategies because it is the first ever to try to shed light on a little-explored topic, although, previously, other studies had touched on similar issues. For example, a 2015 research project had found that companies tend to make bolder financial choices when they have had past successes, probably because those successes boost managers’ confidence. Another study had observed that younger, less experienced managers, often with MBAs, are more likely to vary the amounts invested in hedging transactions. This research, however, takes it further, exploring how CEO narcissism can influence a wider range of business decisions, complementing previous studies that had highlighted how CEO personality influences aspects of the company such as overall strategy, propensity to merge or acquire other companies, and accounting and tax choices.

In sum, this work not only adds a new perspective to understanding financial hedging strategies, but also offers insights into how the CEO’s personality can influence business decisions in times of crisis.

This article is based on
Me, myself and I: CEO narcissism and selective hedging
European Finacial Management