CEO narcissism and the agency cost of debt

Abstract

This study investigates the relationship between CEO narcissism and debt financing costs, highlighting a potential trade-off between leadership traits and firm financial well-being. While prior research has identified potential benefits associated with narcissistic CEOs, such as enhanced innovation, we demonstrate that such leadership incurs higher borrowing costs, as evidenced by elevated bond yields in firms led by narcissistic executives. This effect is amplified for grandiose narcissists, suggesting that investors are particularly wary of their risk-taking tendencies. Leveraging a natural experiment, we establish a robust causal link between narcissism and debt costs, revealing higher bond yield premiums demanded by investors in firms with narcissistic CEOs. These findings underscore the critical importance of considering CEO personality traits, particularly narcissism when evaluating corporate governance practices and ensuring optimal alignment with stakeholders' interests.