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Narrow framing is a conceptual phenomenon used to describe several puzzling observations in the field of economics and finance, including the long-standing equity risk premium puzzle. We integrate the concept of narrow framing into a decision-making framework of CEOs and test it using a sample of performance goals linked with CEO contingent compensation. We propose that the rising complexity of CEO compensation packages which may include multiple targets with several thresholds and differing types of reward pay-outs lead cognitively constrained CEOs to fall back on narrow framing and focus on a small number of goals with the highest risk-reward ratio instead of optimizing for attainment of the entire compensation portfolio. We propose a regression discontinuity design to test our hypotheses.
Machiavelli CEOs and Competitive Aggressiveness: Using Upper Echelons Theory to Understand Competitive Dynamics
This research contributes to the literature on competitive dynamics and upper echelons theory by considering the CEO personality trait of Machiavellianism and its effects on competitive aggressiveness. CEO power is examined as a positive moderator between a CEO’s personality and subsequent competitive actions. A recently developed linguistic tool will be used to analyze transcripts of CEO earnings calls. The literature on competitive dynamics has not yet examined personality traits of CEOs as possible antecedents to important competitive actions. Machiavellianism is one potentially important personality trait that could have great effects on competitive dynamics. Future research directions are discussed and the possible implications of this micro-macro approach to research in the competitive dynamics’ literature is examined.
Suscpicious of Big Brother: Paranoid CEOs and Their Effect on Firm Lobbying Expenditures
University of Arkansas Sergei Kolomeitsev,
University of Arkansas Amy Ingram,
Clemson University Dan Worrell,
University of Arkansas
Research on CEOs primarily focuses on characteristics that portray CEOs as self-assured or attention seeking individuals prone to exaggerated or dynamic strategic decisions, such as charisma, narcissism, hubris/overconfidence, or hyper-core self-evaluation. Yet, psychology research suggests such attention-seeking traits are no more prevalent in society than are traits that manifest greater levels of suspicion and mistrust. As such, we focus on the more attention deflecting characteristic of subclinical paranoia. Given that paranoid individuals engage in avoidance behaviors and are less willing to share information with powerful others, we argue and find that CEO's higher on subclinical paranoia engage in lower amounts of lobbying expenditures, until very high levels. Further, we argue and find a strengthening effect when the CEO or the context indicates the self-as-target bias.
Relative Performance Evaluation of Overconfident CEOs
This paper offers one of the first empirical tests of the relationship between performance evaluation mechanisms and risk-taking by biased chief executive officers ("CEO"s). The literature on CEO overconfidence exclusively focused on the perception of their abilities or an irrational belief in the positive outcomes. We compare the change in the overall risk levels of firms with overconfident CEOs with those with unbiased CEOs upon the introduction of explicit relative performance evaluation ("RPE") contracts. Using an options-based measure of CEO overconfidence, we demonstrate that the use of RPE multiplies excessive risk-taking by biased CEOs. Finally, the size of the RPE peer set also increases risk-taking due to increased ambiguity in performance comparison. We demonstrate that CEO biases are a moderator of incentive contracts.