The “narcissistic” CEO is often the primary contributor to, and a significant indicator of, a company that would move its bottom line artificially through accounting gimmicks, according to research from Macquarie University in Australia.
“There is growing evidence that narcissistic leaders over-identify themselves with the organizations they lead and expend considerable resources to achieve their goals, including engagements in unethical behavior,” the study explains, adding that the findings “highlight the importance of CEO personality to firms’ accounting decisions.”
The authors take the traditional definition of a narcissist from the American Psychiatric Association, including “grandiose belief in themselves, and demand for superiority from others” that act as a defensive mechanisms for their lack of self-esteem and self-confidence. “To reaffirm this belief, they constantly require admiration. The need for such external validation is found to result in narcissistic leaders expending considerable resources on enhancing their public image “
Using that definition, the researchers crated a “Narcissism Score” for CEOs, which is based on ratio of first person singular pronouns to total first person pronouns in the “Question & Answer” sessions during analyst conferences calls held by 5,467 companies following earnings announcements.
The results showed that inflated CEO egos often translated into inflated accounting.
For example, a 1 percent increase in a CEO’s narcissism resulted in 2.218 percent higher use of discretionary accruals. “The Narcissism Score of the CEO exhibits a positive correlation with the level of discretionary accruals,” the study says.
The authors also found CEOs tend to exercise unusually large amounts of options and sell unusually large quantities of their firms’ shares during years in which accruals make up a large component of the firms’ reported earnings.
“While financial incentives are supposedly a governance device, there has also been evidence that narcissistic executives are able to extract higher levels of compensation,” the study states.