CEO psychological biases, firm performance and alternative mechanisms in transition economies: Evidence from Malaysia

Abstract

This study examines the impact of CEO psychological biases (narcissistic and hubristic) in CEOs on a firm’s performance measured by long-term investor value appropriation (LIVA) in Malaysia. Based on a sample of 560 Malaysian firms for 2007–2022, we find the negative effect of CEO narcissism and hubris on firm performance. In comparative terms, the impact of CEO narcissism is more pronounced. Furthermore, we tested the moderating role of CEO attributes. CEO-duality and ownership moderate the CEO-narcissism/hubris LIVA negative relationships, whereas CEO tenure curtails the relationship. Furthermore, we also tested the role of governance in curtailing the effect of CEO narcissism/hubris on LIVA. The findings show that gender critical mass, foreign ownership, and group affiliation substitute the negative impact of CEO narcissism/hubris on LIVA. However, board independence and strategic alliance only weaken the negative effect of the psychological biases (narcissistic and hubristic) on LIVA. In additional analyses, gender critical mass is a substitution mechanism for the direct impact of foreign ownership and group affiliation on LIVA. This study enhances the existing knowledge on CEO narcissism and hubris by illustrating that CEO personality qualities impact the firm performance in the emerging context of Malaysia.

Keywords:

• CEO narcissism
• CEO hubris
• corporate governance
• ownership structure
• relational governance
• Malaysia

SUBJECTS:

• Environment & business
• Asian business
• corporate social responsibility and business ethics

Reviewing editor:

• Huifen (Helen) Cai, Middlesex University Business School, United Kindom

1. Introduction

Since the last two decades, researchers on upper echelons theory have focused on CEO psychological biases (CEO-narcissism and hubris) to highlight the executive decision-making processes (Van Essen et al., 2015; Floyd & Sputtek, 2011; Chatterjee & Pollock, 2017; Tang et al., 2018). Research has shown that both psychological biases (CEO narcissism and hubris) impact firms’ strategic choices almost identically. Though both psychological biases (CEO-narcissism and hubris) are likely to engage in risky initiatives (Li & Tang, 2010), extensive acquisitions (Tang et al., 2018), research and development (Malmendier & Tate, 2005b), and innovation (Malmendier & Tate, 2005b; Nadkarni & Herrmann, 2010; Tang et al., 2015); yet, current empirical efforts have started focusing their adverse effects. For example, (Tang et al., 2018) reported positive and significant impacts of CEO narcissism on a firm’s commitment to firm strategic decisions (CSR), whereas (Chatterjee & Hambrick, 2010a) also reported an adverse effect of CEO hubris on strategic decisions. Furthermore, psychological biases may have differential impacts on firms’ different outcomes. These inconsistent verdicts call for investigating the differential operating mechanisms of CEO narcissism versus hubris at the macro-organizational level.

This study is conducted in two different stages. In the first stage, we explore the diverse operating mechanisms of CEO psychological biases (CEO narcissism and hubris) leading to their differential impacts on a firm’s long-term performance by studying the moderating effect of CEO-level factors. We examine how CEO-level factors affect the association between CEO psychological biases and a firm’s long-term performance. This enables us to explore their operating mechanisms. The study is significant in this field because, though CEO psychological biases are two related executive phenomena (Hiller & Hambrick, 2005; Lee et al., 2017), researchers explore little about their differential impacts on firms’ long-term performance. As far as both CEO psychological biases are concerned, we argue that a narcissistic CEO needs constant applause and courtesy – which is called a “narcissistic supply” (Chatterjee & Hambrick, 2010a) – to sustain his inflated positive self-view; however, a hubristic CEO does not (Chatterjee & Hambrick, 2010a). The firm’s decision may be more economic-oriented (like mergers and acquisitions and R&D) or economic and social-oriented (like CSR).

Similarly, the preferences for both psychological biases may also be different as one is more inclined to decisions that provide him a “narcissistic supply” (like CSR, merger, and acquisitions, etc.), and a hubristic CEO tends to downplay his resource dependence on stakeholders, and thus, would engage in less social activities like CSR (Tang et al., 2018). So, the economic consequences of both CEOs’ psychological biases may differ regarding the firm long-term performance (Cragun et al., 2020; Lee et al., 2017). Researchers have derived several theories for amplifying firm performance by re-combining numerous norms about decision-making phenomena. For instance, confined rationality, asset specificity, and opportunism are the basic assumptions of transaction cost economics. In contrast, opportunism and information asymmetry are the core constructs of agency theory, and resource-based theory assumes confined rationality and uncertainty (Brouthers et al., 2008). However, these theories have consensus on the assumption that people are self-interested and utility maximizes. Extending this behavioral assumption further, agency theory and transaction cost economics also undertake that some persons may employ deception to pursue their self-interest when situations arise. Despite the wide acceptance of these theories, there is a lack of realism in the view that human beings are entirely self-interested. The literature has highlighted the role of agents as self-interest maximizes in the fields of philosophy, sociology (Shore et al., 2009), psychology (Mitchell et al., 2012), social psychology (Ballinger & Rockmann, 2010), and economics (Fehr & Gächter, 2000). In the current study, we are interested in exploring the behavioral impacts of social psychology (Mitchell et al., 2012) on firms’ long-term performance.

The notion that the CEO is crucial has been replaced in studies by investigations into the mechanisms by which they influence corporate performance, focusing on psychological biases. Based on various theoretical frameworks, academics have attempted to determine if CEO psychological biases connect with relevant economic performance outcomes (Cragun et al., 2020). Taking an upper-level perspective, we investigated the impact of CEO psychological biases on corporate performance (Reina et al., 2014; Rovelli et al., 2023). According to Kraft (2022), academics of leadership have connected psychological factors such as leadership styles to firm performance. To study how CEO psychological biases affect company success, we used a direct approach to their impact on long-term performance. So far, there is a lack of empirical research on the effect of CEO psychological biases on firm performance. The CEO of each firm possesses distinct leadership traits (Kraft, 2022), which directly impact their leadership approach and, therefore, the company’s functioning. CEOs with different management styles exhibit varying company decision-making approaches (Park et al., 2018). Their strategic decision might directly impact the firm performance (Tang et al., 2015). In transitional economies, CEO psychological biases are more critical as CEOs are comparatively more independent and face lesser accountability. Thus, the direct association between CEO psychological biases and firm performance may provide new insight for stakeholders.

In the second stage, the study provides an alternative mechanism that may have a substitution/weakening role for the association between CEO psychological biases (CEO narcissism and hubris) and the firm long-term performance. In this context, we explore the part of corporate governance, ownership structure, and relational governance. In the literature, there is a consensus that misuse of CEO power is more pronounced in the weak corporate governance mechanisms in transition economies (Young et al., 2008). Governance mechanisms are assumed to be effective under a well-developed legal and institutional system (Hass et al., 2016; Yiu et al., 2019; Young et al., 2008).

Indeed, we expect that governance may finally be inaugurated to come into effect in transition economies like Malaysia; nevertheless, there is a need to broaden the picture of corporate governance in transition economies (Zeitoun et al., 2019). We attempt to contextualize how governance mechanisms work to guard against CEO psychological biases in Malaysia. First, Malaysian firms have been exposed to moderate pressure from the capital market. Under medium external force, an entrenched CEO often pursues his self-interest and survival (Zeitoun et al., 2019). As a result, firms suffer financially. Second, there are two principal approaches to distinguishing between cash flow rights and control rights (voting rights) since pyramidal ownership and golden share exist in Malaysia. These ownership structures enable controlling shareholders to maintain their influence on firms. This separation of shares reduces the Type I Agency Problem (between agent and principal), yet the Type II Agency Problem arises (between controlling and minority shareholders). As a result, majority shareholders expropriate minority shareholders’ rights. Such behaviors of controlling shareholders make a CEO “inner-circle” member of controlling shareholders under the business arrangement as Consortia. Such a CEO is more concerned with guarding and maintaining shareholders’ wealth and legacy from external pressures. Hence, he may have extraordinary power, resulting in value-destroying to the minority shareholders.

The literature strongly supports such type of behavior (Bae et al., 2020), and often termed with a view of Type II Agency Problem in the management literature. Altogether, the impacts of a CEO’s psychological bias on firm performance depend upon the context in which the firm operates. Third, we observed a significant improvement in governance during the sample period. Implementing new code (CG code, 2016) requires firms to apply 36 practices as indicated or to explain the reason, leaving less wiggle room than the traditional ‘Comply or explain’ approach. Fourth, we find substantial progress in boardroom diversity: as of the end of 2018, every listed firm has at least one woman director. For a transition economy, this is a very rare statistic. Lastly, foreign investment in Malaysia has been oscillating between USD 9 billion and USD 12 billion since 2010, making the country one of the highest recipients of FDI in the region. The literature shows that the presence of foreign ownership ensures compliance with governance. Therefore, in the first instance, we rationally recommend that a CEO’s psychological bias is negatively associated with a firm’s long-term performance under moderate capital market pressure and weak firm structure (i.e. Chaebol).

Furthermore, it is pretty reasonable to suggest that changes in governance structure may serve as a weakening/substitution mechanism for a negative association between CEO psychological biases and firm performance. Recently, the academicians have moved beyond the principal-agent relation to search the boundaries of what establishes corporate governance. Based on this open-system perspective, corporate governance is considered an alignment among several interests and goals of a firm’s constituents (Aguilera et al., 2008). We propose three alternative mechanisms (corporate governance, ownership structure, and relational governance) to control the negative impacts of CEO psychological biases on a firm’s long-term performance.

Our study has several contributions to the existing literature. First, it contributes to the research on executive biases in general and the upper echelons theory in specific by highlighting the differential operating mechanisms of CEO narcissism versus hubris at the macro-organizational level since literature has made little or almost negligible efforts to explore and compare the influences of the two prominent executive biases on firm long-term performance. Second, we explore the CEO-level factors that may moderate/weaken the negative association between CEO psychological biases and firm performance. Third, our results also support the notion that curtailing the negative association between CEO psychological biases and firm performance can be mitigated with different combinations of governance mechanisms. Therefore, a firm must be committed to deliberate flexibility in formulating a bundle of governance practices to eliminate/minimize the negative consequences of CEO psychological biases. Fourth, prior researchers have mainly focused on the Western contexts (Chatterjee & Hambrick, 2010b; Hambrick et al., 2005); only a few studies have been conducted in Eastern contexts (Tang & Liu, 2012; Tang et al., 2018). Since, in general, the Eastern context involves the apprehension for external validity of prior research, exploring the earlier findings in diverse country settings is imperative to substantiate and generalize the previous results. Lastly, we use long-term investor value appropriation (LIVA) to proxy firms’ long-term performance (Wibbens & Siggelkow, 2020). As CEO psychological bias may involve decisions that have long-term impacts on firm performance, it is pretty challenging to capture the effects of these decisions through measures like ROA and cumulative abnormal returns (CAR), because they may have difficulty picking up long-term performance consequences.

The study is organized as follows. In the next section, the theory and hypotheses are discussed. Next, the methodological choices are explained, followed by the results, discussion, and conclusion.

2. Theory and hypotheses

2.1. CEO psychological biases and firm performance

According to recent developments in upper echelons theory, the researchers argue that narcissism and hubris are psychological biases of individual CEOs (Hiller & Hambrick, 2005). A narcissist has an inflated positive self-view, and he needs constant affirmation from others (Chen & Young, 2010). Consequently, narcissists prefer to remain a central point of attention. Conversely, hubris has an overstated self-confidence or arrogance because of related impetuses and dispositional traits (Campbell & Mínguez-Vera, 2008). So hubris ”overestimates one’s actual ability, performance, level of control, or chance of success” (Campbell & Mínguez-Vera, 2008). Typically, a Hubristic CEO overrates his abilities while neglecting the initiatives of others (Campbell & Mínguez-Vera, 2008). Since CEO narcissism and CEO hubris have a shared theme of too-optimistic self-assessment (Van Essen, 2015; Tang et al., 2015), they are often theorized as narrowly correlated constructs in literature. The studies also contributed to this dominant rhetoric by showing that these executive psychological biases have identical effects (Chatterjee & Hambrick, 2010a; Tang et al., 2015). So far, there is little evidence of the opposite effects of CEO narcissism and CEO hubris on the different outcomes (Petrenko et al., 2016). Given the theoretical and practical importance, empirics have focused on either narcissism or hubris, leaving their differential roles. In reality, the personality psychology literature reflects both constructs (narcissism and hubris) as two diverse psychological alignments (Cummings & Knott, 2018; Gerstner et al., 2011; Jun Park, 2014; Stock et al., 2019). Unlike other empirical contexts (innovation, risk-taking, CSR), firm performance has the ultimate test of both psychological aspects (Tang et al., 2018). Strategic decisions have a positive long-term impact on businesses’ operational success. Previous research suggests that CEO psychological biases frequently lead to overinvestment that might impact a firm’s long-term performance. From this angle, it is unclear if the CEO’s psychological may have an impact on the firm performance (Kim, 2019; Nureen et al., 2023; Vinh, 2020). We hypothesise that CEOs with high level of CEO phychological make less wise strategic choices than those that are not. Additionally, numerous earlier studies demonstrate that long term strategic choices have signficiant impact on firm long-term performance. But CEO phychological may lead to overconfident and an overconfident CEO sometimes overinvest, which could result in poor long-term performance.

2.2. Hypotheses development

The literature provides evidence for the association between CEO narcissism and firm performance, but this evidence has not yielded a conclusion. In this vein, (Chatterjee & Hambrick, 2010a) found CEO narcissism as a positive predictor of performance extremes. They measured performance as deviations from average industry stock returns and performance fluctuation (the change in ROA). Peterson et al. (2012) reported evidence showing that CEO narcissism is positively related to ROA, and the relation is moderated by firm identification. Similarly, (She et al., 2019) found a positive and significant association between CEO narcissism and a firm’s EPS (earnings per share). In contrast, (Ham et al., 2018) reported a negative and significant association between CEO narcissism and a firm’s profitability (ROA).

As far as CEO hubris is concerned, two competing views exist, i.e., heroic versus pessimistic. The heroic view confers that a dominant CEO may be a “hero” (Tang et al., 2018) since he can help top management effectually make intricate decisions (Ham et al., 2018; Peterson et al., 2012) or every so often recommends aberrant strategies that may help better performances (Tang et al., 2018). In contrast, (Li and Hong et al., 2016) contended that a hubristic CEO tends to make risky decisions because he overrates his problem-solving capabilities or underrates the essential resources (Hiller & Hambrick, 2005). Taken together, earlier researchers have not been able to conclude whether a hubristic CEO is contributive or damaging to corporate long-term success. To address the concerns, we attempt to contextualize the scope of conjecturing for the impacts of CEO hubris on the firm performance. Furthermore, CEOs are involved in different strategic choices like R&D investment, merger and acquisition (Vinh, 2020), and CSR investment, which might impact a firm’s future cash flows (Deshmukh et al., 2013). These decisions are likely to affect long-term performance in emerging markets. These investments can be hazardous and yield losses that may not materialize for years if the decisions are made without vision (Deshmukh et al., 2013). Thus, CEO psychological biases may lead to overconfidence that may hamper firm long-run performance (Tang, Mack, & Chen, 2018).

Therefore, we conclude that both CEO psychological biases negatively affect firms’ long-term performance in Malaysia. Most prior research highlighted their role in short-term performance, which may not be appropriate as long-term strategies often reward in the long term (Asad & Sadler-Smith, 2020; Tang et al., 2018). So, the current study explores the impacts of both CEO psychological biases on firm long-term performance in the Malaysian context and the hypothesis as follows:

Hypothesis 1: CEO psychological biases (CEO narcissism and hubris) are negatively associated with a firm’s financial performance in Malaysia.

Hypothesis 1a: CEO narcissism is negatively associated with a firm’s financial performance in Malaysia.

Hypothesis 1b: CEO hubristic is negatively associated with a firm’s financial performance in Malaysia.

The strategic decisions are long-term reward-oriented since the literature has not yet explored their differential role in firms’ long-term performance. By studying the economic aspects of their strategies, we can disentangle the operating mechanisms of both CEOs’ psychological biases at the firm level. Precisely, a narcissistic CEO is always keen to have a reaffirmation of his preeminence from others. He often derives his “narcissistic supply” from individual demonstration (Y. Tang et al., 2018) or from the attention/adulation of others around him (Craig Crossland & Chen, 2013). Since narcissistic CEO is always looking for openings to attract others attention, esteem, and ovation, sooner or later, he would turn to initiatives to satisfy his needs irrespective of their outcomes like CSR, M&M (K. Campbell & Mínguez-Vera, 2008); Chatterjee & Hambrick, 2010b; Petrenko et al., 2016). Such strategic decisions need a strong backup from leadership financial assistance from outsiders (Bogart, Benotsch, & Pavlovic Pavlovic, 2010) because such decisions may deter long-term performance (S. F. Cahan, Chen, & Chen, 2017; S. F. Cahan et al., 2015). Likewise, there is a natural tendency to attribute a firm’s behavior and outcomes to its CEO (S. F. Cahan et al., 2017). In line with this argument, (S. F. Cahan et al., 2015) also stated that a narcissistic CEO is likelier to initiate activities that attract a stable brook of ovation to enhance his “narcissistic supply.“ A hubristic CEO, in contrast, observes an ominously abridged need for stakeholder backing (Godfrey, 2005), like CEO trusts in his abilities (Li & Tang, 2010), overrate his resource legacies (Malmendier & Tate, 2005b, 2005a), and believes that his destiny is utterly in his own hands (Malmendier & Tate, 2005b). Since the economic benefits of long-term strategies take time to emerge, his belief is enforced. Tang et al. (2015) validated, by underrating the extent of funds expected from investors for either a firm’s survival or development, a hubristic CEO is less interested in retorting to activities that attract a stable brook of ovation to enhance his fame since he is self-motivated rather than looking for openings to attract others attention, esteem, and ovation as a narcissist does.

In conclusion, the underlying variances between CEO narcissism and hubris priorities explain the inconsistent relationships with the firm’s long-term performance. To advance our research, we explore the differential impacts of CEO narcissism and CEO hubris on firms’ long-term performance in the Malaysian context. Though the literature documents the negative effects of both CEO psychological biases (CEO-narcissism and hubris) on firm performance, we expect that CEO-narcissism has more pronounced negative impacts on firm performance due to the nature of his decision-making styles. Based on this view, we construct the following hypothesis.

Hypothesis 2: CEO narcissism has comparatively more pronounced negative impacts on firm long-term performance than CEO hubris in the Malaysian context.

2.3. The moderating role of corporate governance contingencies

Once it is established that both CEO psychological biases are negatively associated with a firm’s performance, the literature confers that CEO-level factors can moderate/weaken the negative relation between them. While keeping our base argument that both CEO psychological biases are negatively associated with a firm’s financial performance, we argue that CEO power is an enabler for their negative association. In the context of CEO power, the factors enabling a CEO to exert his will to achieve his desired objectives are moderators (Ko, Pan, Kuo, & Ko, 2020). When a CEO also chairs, the board’s vigilance is weakened (Van Essen, 2015; Jarboui, 2016). As a result, CEO-duality amplifies managerial entrenchment concerns since a CEO with the dual role (1) can direct the agendas/contents of board meetings (Tai, 2020), (2) can control most valued information evolving from directors’ meetings, and (3) can reinforce his power by selecting loyal directors. Likewise, the CEO chair is more likely to allow the chair-CEO to seek his private comforts in a fairly self-constructed way (Singh, Tabassum, Darwish, & Batsakis, 2018). Our study is mainly concerned with the role of both CEO psychological biases on firm performance; in this context, we expect that CEO-chair may amplify the negative relation of both CEO psychological biases in line with earlier findings (Krause et al., 2014; F. Li, Li, & Minor, 2016; M. Li & Yang, 2019; Misangyi & Acharya, 2014). For this purpose, we construct the following hypothesis.

Hypothesis 3a: The negative relationship between CEO psychological biases (CEO narcissism and hubris) and firm performance will be stronger in the case of chair-CEO in Malaysia.

It’s a broad observation that a CEO gets more power if he sustains his current position, irrespective of firm sources (Wei Shen & Cannella, 2003). With an increase in his current role, the CEO will likely acquire executive proficiency, advance relations with the board, and gain a substantial impact on the firm (Van Essen, 2015; Floyd & Sputtek, 2011). CEO power is mainly linked with his tenure. Once a new CEO is appointed, he is more likely to confront substantial encounters and hindrances he has never experienced. Conversely, a new CEO needs to be accepted by the board to secure his authority. Therefore, until he meets the prospects of his board, the power of a new CEO may be comparatively weaker than that of an established CEO. Further, an increase in CEO tenure may result in his managerial capability and preference (W.-C. Gerstner et al., 2011; Y. Tang, Hom, et al., 2015). As a result, the CEO may opt to reinforce his power by picking “compliant” directors. Once the desired board is established, entrenched CEOs’ propensity to make decisions to feed their liking and desires may result in resource appropriation, and overall performance would suffer. Based on these viewpoints, we hypothesize the following:

Hypothesis 3b: the longer the CEO’s- tenure, the stronger the negative association between CEO psychological biases (CEO narcissism and hubris) and a firm’s long-term performance in Malaysia.

Similarly, CEO ownership can reduce the board’s power and enable the CEO to gain control (Jun Park, 2014). Managers act as agents, and their powers accrue to each other in their capacity (Chatterjee & Pollock, 2017; Stock et al., 2019). In general, a CEO with substantial shareholding is more powerful. Further, a CEO who is the founder of a firm or is interrelated to founders in any capacity may have more power, as he can benefit from his exceptional position to advance implied control over the corporate board (Lin, Lin, & Fang, 2022). Thus, CEO ownership assists a CEO in becoming more entrenched. As a result, an entrenched CEO is more inclined to make an undue investment for his aptitude through resource appropriation, which may negatively impact financial performance (Brennan & Conroy, 2013; Lin et al., 2022). The literature also documents that the CEO’s power gain through equity stakes increases his capacity to make self-centered decisions and may result in entrenchment (Florackis & Ozkan, 2009a, 2009b). Therefore, we propose the following:

Hypothesis 3c: The higher the level of CEO ownership, the stronger the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

3. Controlling mechanisms

3.1. Corporate governance

Corporate governance is a crucial mechanism that sets contingencies to apprehend the power dynamics between a corporate board and a CEO. As per managerial entrenchment theory, entrenchment represents managerial manure to protect the position/status of narcissists or hubristic CEOs by increasing their discretion over governance (Zeitoun et al., 2019). Somehow, the CEO tends to defuse the governance controls imposed by stockholders (Jun Park, 2014)(Zeitoun et al., 2019). Nevertheless, because firm decisions are most likely the outcome of collaboration between the CEO and board (Van Essen, 2015), governance eventualities can often test an entrenched CEO’s offsetting maneuvers. The view of power dynamic advocates that corporate governance contingencies include a composite of power trade-offs between the CEO and the corporate board (Bear, Rahman, & Post, 2010a; W. Li & Lu, 2012) and emphasis on the effectiveness of board observance and the power of CEOs (Florackis & Ozkan, 2009a, 2009b). However, situations may arise where the corporate board is predominantly observant, possibly restricting the CEO from pursuing his self-interest (Latif, 2018; Singh et al., 2018; Zeitoun et al., 2019). Therefore, we assume that the board mechanism can be used as a constraint to both CEO psychological biases.

Board independence is imperative for the power dynamics between a CEO and a corporate board (Gao & Han, 2020). Corporate governance academics have long highlighted the presence of independent directors as a primary mechanism to observe and control executives (Hong et al., 2016; Li & Lu, 2012). Evidence shows that board independence is a crucial determinant of firm performance (Campbell & Mínguez-Vera, 2008; Chatterjee & Pollock, 2017). Independent directors are more vigilant compared to inside directors since they (1) monitor financial performance, (2) are obliged to remove failing CEOs, and (3) are more concerned about developing their repute as directors (Nasr & Ntim, 2018; Srinidhi et al., 2011). Resultantly, they have an essential incentive to monitor CEOs (Lin et al., 2022; Zeitoun et al., 2019). Precisely, independent directors monitor the entrenched directors by controlling their discretion to prevent resource expropriation from CEO investments over disapproving budget proposals (Hong et al., 2022; Lin et al., 2022). For that reason, we propose that the negative association between CEO narcissism and hubris and firm performance could be weakened by board independence.

Hypothesis 4a: The presence of board-independence substitutes/weakens the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

The second governance mechanism that can be used to encounter CEO discretion is board gender diversity. However, female directors may have minimal influence on firm decisions due to their perceived token status and gender-role stereotyping (Nasr & Ntim, 2018; Srinidhi et al., 2011). Prevalence of such conventions may support the notion that the role of one female director is limited; therefore, she may come across adverse practices (Hoang et al., 2017; Rao & Tilt, 2016) or even be met with emphatic scorn (Nekhili et al., 2018). Once the presence of a token minority reaches a point where the group is not reflected as a token, the nature of their relation and perspective of the group changes substantially as female directors become less constrained (Bear et al., 2010a). Prior studies demonstrated that a critical mass (three women directors) adds value to boardrooms by empowering female directors to play their role (Campbell & Mínguez-Vera, 2008; Chen et al., 2016; Elmagrhi et al., 2018). Critical mass is associated with higher board member presence, frequency of meetings, fewer agency conflicts (Campbell & Mínguez-Vera, 2008; Jouber, 2022), and board vigilance. In addition, the board with critical mass is more likely to ask for additional information or updates on the subject matter and takes the initiative once the decision is finalized (Jouber, 2022). Therefore, we conjecture that gender-critical mass can be used as a controlling mechanism for a negative association between CEO psychological biases and firm performance. Hence, we hypothesize as:

Hypothesis 4b: The presence of gender-critical-mass substitutes/weakens the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

3.2. Ownership structure

Corporate governance imitates important stakeholders’ social/economic structures and norms (Filatotchev et al., 2013; Luo et al., 2009). Ownership structure monitors board behavior, and merely a nominal proposition may turn out to be cosmetic/symbolic and camouflaged, with the fundamental governance practices and behavior left unaffected (Al Farooque et al., 2007; Filatotchev et al., 2013; Fiss & Zajac, 2004; Luo et al., 2009). We argue that the strength and vigilance of the corporate board are contingent on the degree of ownership structure. Higher foreign ownership leads to better corporate governance (Cho & Rui, 2009; Zhang et al., 2020). This may influence the board’s decision through monitoring CEO activities, and such behavior seems missing when foreign ownership is lower in proportion. Three different aspects can explain the relevance of foreign ownership. First, geographical distance and cross-national differences magnify the conflict of interest and information asymmetry between the foreign investor and management (Buckley & Casson, 1998). The separation in intents and risks between domestic and foreign investors, along with the customary governance practices employed by the domestic investors, may entice foreign investors to engage in CG practices to protect their self-governance logic (Buckley & Casson, 1998; Han et al., 2022). Second, foreign stockholders are inclined to hold a comparatively small stake and hardly seem like strategic stockholders, which lessens their motivations for direct observing and their capacity to present fundamental changes. Third, foreign stockholders trust both voices through direct meetings with board members or exit strategies to strengthen their comfort (Ahmadjian & Robbins, 2005). Foreign stockholders have pleaded for the regulatory adoption of a transparent process of external supervision (Buckley & Casson, 1998). Henceforth, the higher level of foreign ownership represents a greater prospect concerning the observing role of the board. Therefore, we hypothesized as under:

Hypothesis 5a: The presence of foreign-ownership substitutes/weakens the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

Regarding state ownership, (Jarboui, 2016) argued that CEOs become more aware that they are being observed and weighed closely; hence, they perform better (Grøgaard et al., 2019; Jouber, 2022). Furthermore, (Ding et al., 2007) argued that state ownership constrains the CEO’s investment choices, which results in the implication of financial policies that are guided rather than discretion. In contrast, Gaio and Pinto (2018) stated that state ownership does not constrain firms’ capital structure in China. Similarly, state ownership positively impacts firm performance (Li et al., 2016). In Malaysia, the state has a significant portion of investment in the equity market. The constant prevalence of state-controlled firms and their capability to exercise substantial market power and use their access to regulatory agencies to their favor suggests that state ownership constrains the firms’ policies. Hence, we confer that state ownership can curb the discretionary powers of the CEO. Based on these viewpoints, we hypothesize the following:

Hypothesis 5b: State ownership substitutes/weakens the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

3.3. Relational governance and CEO psychological biases

Relational governance is defined as a non-legal sanction that depends on trust and normative behavior to operate as a self-enforcing precaution in mitigating the risks of opportunism (Dyer et al., 2018; Krishnan et al., 2006; Luo, 2008; Poppo & Zenger, 2002; Poppo et al., 2008; Zhong & Sun, 2020). Carson et al., (2006) divided relational government into three primary forms: reputation, trust, and continuity. The control characteristic of formal contracts, counteract opportunistic behaviors, and attenuate opportunistic behaviors in a relationship are supplanted by belief and reputation (Carson et al., 2006; Dyer et al., 2018). Once the continuity is expected, partners’ incentives for long-term commitments are automatically enhanced for longer vows that overturn opportunistic conduct. Resultantly, firms in an association have strong motivations to observe and balance each other to maintain one’s repute, trust, and continuity in the relationship from being stained if the other party misuses powers and to ensure that their relational investments are not jeopardized (Keister, 2009; Rosenkranz & Wulf, 2019; Zhong & Sun, 2020). Based on these viewpoints, we explore the roles of two relational governance mechanisms (strategic alliances and business group affiliation) in Malaysia.

Strategic alliances have been a dominant strategic choice for firms because of informational asymmetry, unbalanced resource provision, and limited resource mobility (Peng & Heath, 1996). Since the firms are subject to relational governance in strategic alliances, they are involved in repeated inter-organizational exchanges with a significant relationship-specific asset. Regardless of the opportunistic perils of strategic alliances (Carson et al., 2006), we argue that such collusive acts cost more in Malaysia for two reasons. First, Malaysia is a close-knit society, and familiarity among alliance members is expected, which may temper the opportunistic propensities of both CEO’s psychological biases. Second, the trust motivates strategic partners to invest in relation-specific assets. Therefore, we predict that strategic alliance may diffuse the negative impacts of both CEO psychological biases on firm performance. Hence, hypothesize as under:

Hypothesis 6a: The strength of strategic alliance relationships substitutes/weakens the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

In general, business groups refer to groups of legally self-governing firms connected by multiple ties, including a significant portion of stock ownership and the social and/or economic associations that help them achieve mutual objectives (Khanna & Rivkin, 2001). Therefore, we posit that group affiliation may be an alternative governance mechanism to prevent affiliated firms’ CEOs from using their discretion for self-initiated projects. Our arguments are based on several reasons. First, due to weak corporate governance, business groups must monitor affiliate firms since the group parent has better information and position to monitor and discipline its affiliate firms (Chang & Hong, 2000; Hoskisson et al., 2004; Lu & Ma, 2008; Ma et al., 2006). Second, given that CEO mobility is less lively, CEOs are not inclined to challenge group policies; otherwise, turnover threatens CEOs (Berger et al., 2017; He et al., 2017). Third, solidarity norms and behavior codes are the main features of business groups (Berger et al., 2017; Gulati & Nickerson, 2008). Likewise, the “moral economy” group culture (Berger et al., 2017) also imposes a normative sanctioning mechanism that limits group affiliates’ CEO discretion. Last, the cost of being inefficient or failing with a business group is so high for the group affiliate that it would cause the entire group reputational harm (Keister, 2009; Ma et al., 2006). We, therefore, hypothesize as follows:

Hypothesis 6b: firm business group affiliation substitutes/weakens the negative association between CEO psychological biases (CEO narcissism and hubris) and firm performance.

3.4. Control factors

Other factors may have a potential influence on a firm’s financial performance. We controlled for firm leverage, size, age, count of news articles, market intensity, and number of acquisitions. Firm size is positively associated with firm performance. Likewise, mature firms also have sufficient capital (human and financial) to align their resources better, ultimately improving firm performance. In contrast, high leverage will likely reduce a firm’s long-term performance. Lastly, we managed the count of news articles covering CEOs in a specific year. We also control for a set of CEO-level factors. These include CEO chair, ownership, and tenure (Abernethy et al., 2019). The standpoint of CEO-chairperson duality (Yu, 2023) demonstrates that chairperson duality positively impacts firm performance. Hsu et al. (2021) in contrast, researchers show a negative relationship between research, CEO duality, and firm performance. Even when the environment changes, tenure may enable a more effective and efficient management strategy (Hsu et al., 2020). Additionally, executives who stick around long-term develop relationships inside and beyond the company. Thus, tenure is likely to improve firm performance. In contrast, CEO ownership empowers them to dominate corporate policies. CEO ownership improves firm performance (Kao et al., 2019). For a definition of variables, see Appendix A.

3.5. Measuring narcissism and hubris

(Chatterjee & Hambrick, 2011) established a composite measure of CEO narcissistic tendencies. They use unobtrusive indicators extracted from archival data and used by many researchers (Braun, 2017; Chatterjee & Pollock, 2017). Following a discreet approach, we use a four-item index to measure narcissism: (1) the prominence of the firm CEOs’ photograph in its annual reports, (2) the prominence of CEOs in the firm’s press releases, (3) the non-cash as well as 4) the cash compensation of the CEO in comparison to other top executives at the same firm. To address issues related to succession, we use the two-year moving average of each narcissism indicator, and observation to the first year of the CEO’s appointment is omitted and figured the CEO-narcissism measure by taking the mean of each indicator once it is standardized following Zhu and Chen.

Following Tang et al. (2018), we use a media-based measure of CEO-hubris tracking. First, we collected news articles that cited the CEOs in our sampled firms from the most prominent newspapers, including the Star, New Straits Times, the Sun, Berita Harian, Utusan Malaysia, and Sin Chew Jit Poh. For each CEO, we totaled the number of terms that advocated confidence (including confidence, confident, optimistic, or optimism) along with the number of terms that inferred conservatism (including reliable, cautious, conservative, practical, frugal, steady, not confident, or not optimistic). Only that term that appeared within 10 words before/after the CEO’s name was cited is included. To conclude, we figured out the CEO-hubris measure by subtracting the conservatism terms from the count of confidence terms and then dividing the difference by the total of the two counts for each CEO in each period.

3.6. Dependent variable LIVA

Theoretical models assume a firm maximizes absolute profits and long-term net present value (NPV). In contrast, empirics usually assess performance using short-term ratios like ROE/ROA, which may not appropriately explain fundamental economic performance, specifically for long periods (Wibbens, 2018). The current study addresses this gap by following “long-term investor value appropriation“ (LIVA). LIVA is an empirical measure of long-term firm performance. It is based on a backward-looking NPV measure developed using data from listed companies (Wibbens & Siggelkow, 2020). For this purpose, the study estimates the ex-post discounted value of all cash flows to and from stockholders between two periods (t = 0 and t = T). The value is equal to assuming that at time 0, investors ${\mathrm{V}}_0$, firm’s value at the time: in the following period t, the stockholders receive free cash flow (FCF) produced by the firm $F\hspace{0.17em}\text{C}\hspace{0.17em}{\text{F}}_{\text{t}}$ at time T, stockholders trade the firm for its market price $V_T^2$. By taking the sum of the present value of these cash flows at time t = T yields, with r representing the total cost of capital: (1) $$\mathit{\text{LIVA}}=V_T-V_0{\left(1+r\right)}^T{\displaystyle \sum }_{t=1}^T\frac{FC{F}_t}{{\left(1+r\right)}^{t-T}}$$(1)

Similarly, taking the starting and ending values ${\mathrm{V}}_{\mathrm{t}}$ equals to the value of the firm (the market value of equity plus the book value of debt), Eq. (1)(1) $$\mathit{\text{LIVA}}=V_T-V_0{\left(1+r\right)}^T{\displaystyle \sum }_{t=1}^T\frac{FC{F}_t}{{\left(1+r\right)}^{t-T}}$$(1) is equal to: (2) $$\text{LIVA}={\displaystyle \sum }_{t=1}^T\frac{E{R}_t\text{M\hspace{0.05em}\hspace{0.05em}}{C}_{t-1}{\text{FCF}}_t}{{\left(1+r\right)}^{t-T}}$$(2)

In Eq. (2)(2) $$\text{LIVA}={\displaystyle \sum }_{t=1}^T\frac{E{R}_t\text{M\hspace{0.05em}\hspace{0.05em}}{C}_{t-1}{\text{FCF}}_t}{{\left(1+r\right)}^{t-T}}$$(2) , ${\text{ER}}_t$ represents the excess return (shareholder return > the cost of equity) over period t, and ${\mathrm{\text{MC}}}_{\mathrm{t}-1}$ is the firm’s market capitalization (numbers of shares × the market value of each share) at the start of time t.

4. Models and technique of analysis

We employ the two-step GMM estimator (Arellano & Honoré, 2001). Since we use closely related terms like CEO narcissism and hubris and the moderating role of CEO-level factors, In line with Syofya (2022), a two-step system GMM estimation was used to examine the impact of psychological biases on firm performance. System GMM estimation can handle endogeneity, measurement errors, omitted variable bias, and unobserved heterogeneity caused by reverse causation (Alam et al., 2020; Obeng et al., 2021). The reverse causality may also occur since managers may be more willing to undertake strategic activities when their firm value is higher (Martínez-García et al., 2021). GMM is the best approach to take on this problem. The first difference residuals’ first-order autocorrelation AR(1) results demonstrate that all models reject the null hypothesis of no autocorrelation. The null hypothesis, which implies no autocorrelation, cannot be rejected by second-order autocorrelation AR(2) in the first difference residuals (Martínez-García et al., 2021). This demonstrates that the models’ dynamic lag structure—one lag for the firm performance variable—is adequate. Using reliable tools for the study is a significant factor in how well the dynamic GMM estimation turns out. The Hansen J statistic of over-identifying limitations was employed to test the validity of the instruments, and the findings suggest that the instruments are valid in the models (Yousaf et al., 2022). We use the following model to test the hypotheses 1-3. model 1 $$\text{ln \hspace{0.33em}}\mathit{\text{RG}}D{P}_t={\gamma }_0+{\gamma }_1\text{ln}\hspace{0.17em}{e}_t+{\gamma }_2\mathit{\text{ln}}{(\frac{\mathit{\text{ED}}}{\mathit{\text{GD}}P})}_t+{\gamma }_3\text{\hspace{0.33em}ln \hspace{0.33em}}P{I}_t++{\gamma }_4\text{\hspace{0.33em}ln \hspace{0.33em}}E\mathit{\text{ex}}{p}_t+{\gamma }_5\text{\hspace{0.33em}ln \hspace{0.33em}}R{M}^s{}_t+{\gamma }_6\mathit{\text{In}}{f}_t+{\epsilon }_t$$model 1

To test hypotheses 4-6, the study uses the following model model 2 $${\mathit{\text{LIVA}}}_{i,t}=\alpha +{\beta }_1{\mathit{\text{CEO Pchological biases}}}_{i,t}+{\beta }_{2}c\mathit{\text{orporate}}\mathrm{ }g\mathrm{o}\mathit{\text{vernance}}+{\beta }_3{\mathit{\text{ownership structure}}}_{\mathrm{ }\mathit{\text{si}},t}+{\beta }_4{\mathit{\text{reletive governance}}\mathrm{ }}_{i,t}+{\beta }_5{\mathit{\text{CEO Pchological biases}}\times \mathit{\text{corporate governance}}\mathrm{ }}_{i,t}+{\beta }_6{\mathit{\text{CEO Pchological biases}}\times \mathrm{o}\mathit{\text{wnership structure}}\mathrm{ }}_{i,t}+{\beta }_7{\mathit{\text{CEO Pchological biases}}\times \mathit{\text{reletive governance}}\mathrm{ }}_{i,t}+{\beta }_8{\mathit{\text{CEO Pchological biases}}\times \mathit{\text{foreign ownership}}\mathrm{ }}_{i,t}+{\beta }_9{\mathit{\text{CEO Pchological biases}}\times \mathit{\text{strategic alliance}}\mathrm{ }}_{i,t}+{\beta }_{10}{\mathit{\text{control factors}}}_{i,t}+{{\beta }_{11}y\mathit{\text{ear effect}}}_{i,t}+{{\beta }_{12}i\mathit{\text{ndustry effect}}}_{i,t}+{\epsilon }_{i,t}$$model 2

Finally, the study tests the substitution role of those mechanisms that have mitigated the negative relation between CEO psychological biases and LIVA. In this model, we tested the interplay of these variables and whether these variables substitute each other. model 3 $${\mathit{\text{LIVA}}}_{i,t}=\alpha +{\beta }_1{\mathit{\text{CEO Pchological biases}}}_{i,t}+{\beta }_2{\mathit{\text{gender critical mass}}}_{i,t}+{\beta }_3{\mathit{\text{foriegn ownership}}}_{i,t}+{\beta }_4{\mathit{\text{group affiliation}}\mathrm{ }}_{i,t}+{\beta }_5{\mathit{\text{gender critical mass}}\times \mathit{\text{foriegn ownership}}\mathrm{ }}_{i,t}+{\beta }_6{\mathit{\text{foriegn ownership}}\times \mathit{\text{group affiliation}}\mathrm{ }}_{i,t}+{\beta }_7{\mathit{\text{control factors}}}_{i,t}+{{\beta }_{8}y\mathit{\text{ear effect}}}_{i,t}+{{\beta }_{9}i\mathit{\text{ndustry effect}}}_{i,t}+{\epsilon }_{i,t}$$model 3

5. Descriptive statistics and variance inflation factor

The descriptive statistics of our variables are provided in Table 1 below. There are 5446 numbers of observations. The mean value of LIVA is 3.7%, with maximum and minimum values 9.628 and -7.581 respectively. The mean values of Hubris and Narcissism are 1.557 and 0.785, respectively. On the other hand, to address the multicollinearity problem, we also checked variance inflation factors (VIFs). The values of all the VIFs are smaller than 3, far below the benchmark value of 10. Therefore, our regression models were relatively free from potential multicollinearity problems. For brevity, we did not present the results of VIF.

Table 1. Descriptive statistics.

	Mean	Maximum	Minimum	S/D
LIVA	0.038	9.765	−7.689	0.707
Hubris	1.579	1.974	0.103	0.418
Narcissism	0.796	1.376	0.216	0.339
Market intensity	7.463	65.942	−96.692	13.212
ROA	0.084	37.304	−18.214	19.884
Strategic Alliance	0.063	1.000	0.000	0.096
News Articles	1149.422	1390.467	694.726	−22.135
Board-independence	0.239	0.845	0.191	0.160
CEO-ownership	0.096	0.362	0.002	0.099
Financial leverage	0.438	35.142	0.057	5.721
Foreign-ownership	0.060	0.796	0.000	6.296
Group-affiliation	0.119	1.000	0.000	0.192
Government-ownership	0.057	1.000	0.000	0.245
Gender critical mass	0.138	1.000	0.000	0.173
Gender-diversity	0.798	1.000	0.000	0.133
CEO-tenure	6.142	21.298	3.000	3.956
CEO-chair	0.211	1.000	0.000	0.164
Firm-age	47.797	57.809	21.298	4.153
Size	6.897	11.162	2.605	2.067

6. Results

6.1. CEO-narcissism and hubris and firm performance

Diagnostic testing satisfied two requirements for the consistency of the two-step GMM estimate. The validity of the instruments (the lagged values of the variables) and the lack of second-order serial correlation in the error terms were first assessed using the Sargan test of over-identification constraints (Kiviet & Kripfganz, 2021). According to the null hypothesis, the instruments employed in the regression do not correlate with the residuals. Second, we performed serial correlation using the Arellano-Bond (AR1 and AR2) test (Nguyen, 2021). The errors in the first-differenced (AR1) must be correlated under the null hypothesis, while the errors in the second-differenced (AR2) should not show any serial correlation. The null hypotheses are accepted for both tests (Sargan, AR1, and AR2). These meet the prerequisite for GMM estimates.

Table 2 presents the findings of model 1. In column 1, the results are provided without the interaction term to compare the coefficient of the main variable with column 2, where interaction terms are used. In hypothesis 1, we predict the negative impacts of CEO psychological biases on LIVA. For CEO psychological biases (narcissism and hubris), we construct two sub-hypotheses, 1a and 1b, for our main hypothesis 1. The findings show that CEO narcissism and hubris are negatively associated with LIVA (for narcissism, β = -0.214 p<.05 and for hubris, β = -0.099 and p<.10 respectively: refer to column 2 in Table 2). These results align with our prediction that CEO narcissism and hubris will likely impact LIVA negatively; hence, our main hypothesis 1 (sub-hypotheses 1a and 1b) is supported. These findings also align with earlier studies that predicted the negative impacts of CEO psychological biases on firm performance (Hiller & Hambrick, 2005; Tang et al., 2018). In hypothesis 2, we predict that the differential effect of CEO narcissism is more pronounced as a narcissist is more likely to be involved in activities that may provide him a “narcissistic supply.” We subtract the coefficient values of narcissism from hubris (β= -0.214-(-0.099) = -0.115) and find an 11.50% higher negative impact for narcissism. Meanwhile, the level of significance for narcissists is comparatively higher (5% for narcissists and 10% for hubris). Therefore, our hypothesis 3 is also supported.

Table 2. CEO psychological biases and LIVA.

	Column-1		Column-2
	Coefficient	t-statistics	Coefficient	t-statistics
LIVA (t-1)	0.660***	4.344	0.701***	4.241
CEO-narcissism	−0.212**	−2.232	−0.214**	−2.553
CEO hubris	−0.097*	−1.791	−0.099*	−1.733
CEO-chair	−0.056*	−1.922	−0.057*	−1.919
CEO-ownership	0.093**	2.213	0.090***	2.254
CEO-tenure	0.083*	1.873	0.088*	1.860
CEO gender	0.008	1.199	0.019	1.218
Other control factors
Acquisition	0.089**	2.349	0.091**	2.312
Marketing intensity	0.251**	2.338	0.254**	2.254
Financial leverage	−0.005	−1.183	−0.005	−1.208
Articles	0.001	0.911	0.001	0.969
Firm-age	0.155**	2.121	0.157**	2.186
Size	0.094**	2.021	0.096**	2.196
Interaction terms
CEO-narcissism × CEO-chair			−0.260***	−3.124
CEO-hubris × CEO-chair			−0.012**	−2.185
CEO-narcissism × CEO-ownership			−0.267**	−2.171
CEO-hubris × CEO-ownership			0.188**	2.250
CEO-narcissism × CEO-tenure			−0.102*	−1.911
CEO-hubris × CEO-tenure			−0.043	−1.309
CEO-narcissism × CEO-gender			−0.314**	−2.097
CEO-hubris × CEO-gender			−0.144**	−2.335
Year-effects	Yes		Yes
Industry-effects	Yes		Yes
Arellano-Bond (AR1)	Pr > z=.003		Pr > z = 0.008
Arellano-Bond (AR2)	Pr > z=.096		Pr > z = 0.166
Sargan test (Chi-square, p-value)	4.71 (p = .000)		6.55 (p = .001)

Table 2 presents the findings of baseline regression models examining the impacts of CEO psychological biases on firm performance. Total number of observations is 6720. In column 1, we present the findings without interaction terms. In column 2, the findings of the main models (including interaction terms) are presented. Industry and year-fixed effects are included in the regressions. ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively.

Before discussing the findings of interaction terms, we discuss the association of CEO-level factors with LIVA. We find that CEO-chair (β = -0.057 and p<.10) and CEO-tenure (β = -0.088 and p<.10) are negative and significant determinants of LIVA (model 2 in Table 2) in line with (Chatterjee & Hambrick, 2010b; Rao & Tilt, 2016). However, we find insignificant impacts of CEO ownership and CEO gender on LIVA (refer to Table 2) (Campbell & Mínguez-Vera, 2008; Lanis, Richardson, & Taylor, 2017; Rao & Tilt, 2016; Tang et al., 2015). To test our hypothesis 3, we include the interaction term between CEO psychological biases (narcissism and hubris) and LIVA. The interaction term between both CEO psychological biases (narcissism and hubris) and CEO-chair show that CEO-chair moderates the negative relation between CEO-narcissism and hubris, and LIVA (for narcissism, β = −0.260, p <.01 and for hubris, β = −0.007, p < .05). Importantly, the result show an increase in coefficient value and level of significant for the interaction term between CEO-narcissism and CEO-chair (Model 2, β = −0.214−(−0.260) = −0.046, p value from 5%to 1%); whereas, we find only increase in magnitude for the interaction term between CEO-hubris and CEO-chair. We confer that the CEO chair significantly moderates the negative relation between CEO psychological biases and LIVA in terms of magnitude but in the level of significance for narcissism only. Hence, our hypothesis 3a is strongly supported by narcissism while partially by hubris. Furthermore, the interaction terms between CEO psychological biases (narcissism and hubris) and CEO tenure show that CEO tenure does not moderate the negative relation between CEO psychological biases and LIVA. Though the interaction term remains significant, we find the same significance level and no significant coefficient value change. Hence, our hypothesis 3c is not supported. Finally, the interaction terms between CEO psychological biases and CEO ownership show that CEO ownership significantly moderates the negative relation between CEO psychological biases (narcissism and hubris) and LIVA in terms of magnitude only (β= −0.214−(−0.267) = −0.053 for narcissism and β = −0.099−(−0.188) = −0.089 for hubris). The significance level remains unchanged (p < .05 for narcissism and p < .10 for hubris). So, our hypothesis 3c is partially supported.

As far as control factors are concerned, We find a firm size, firm age, marketing intensity, and number of acquisitions as positive and significant determinants of LIVA (Castro et al., 2016). However, the findings show an insignificant association between financial leverage and LIVA. We also control for news articles, and the results depict an insignificant association between the count of news articles and LIVA.

6.2. Controlling mechanisms

In the second stage, we test the role of different factors as an alternative mechanism to mitigate the negative impacts of CEO psychological biases on LIVA. In the first stage, we test the part of controlling mechanisms in the association between CEO psychological biases and LIVA. We used separate regression for each controlling mechanism, and the findings are presented in Table 3 below.

Table 3. CEO controlling mechanisms.

	1	2	3	4	5	6
LIVA (t − 1)	0.618***	0.599***	0.524***	0.493***	0.498***	0.508***
CEO-narcissism	−0.206**	−0.189**	−0.180**	−0.204**	−0.201**	−0.174**
CEO hubris	−0.097*	−0.112*	−0.097*	−0.092*	−0.097*	−0.122*
Interaction terms
CEO-narcissism × board-independence	−0.106*
CEO hubris × board-independence	−0.010
CEO-narcissism × gender critical mass		0.299**
CEO hubris × gender critical mass		0.162**
CEO-narcissism × foreign-ownership			0.131**
CEO hubris × foreign-ownership			0.096**
CEO-narcissism × government ownership				−0.168**
CEO hubris × government ownership				−0.097*
CEO-narcissism × strategic alliance					−0.093*
CEO hubris × strategic alliance					−0.010*
CEO-narcissism × group-affiliation						0.248***
CEO hubris × group-affiliation						0.110***
Main variables
Board-independence	0.125**
Gender critical mass		0.166***
Foreign-ownership			0.100***
Government ownership				0.004
Strategic alliance					0.066*
Group-affiliation						0.206***
Control factors
Acquisition	0.077**	0.086**	0.084**	0.083**	0.081**	0.079**
Marketing intensity	0.216**	0.242**	0.237**	0.232**	0.226**	0.221**
Financial leverage	−0.004	−0.005	−0.006	−0.005	−0.006	−0.004
Articles	0.001	0.002	0.001	0.001	0.003	0.001
Firm-age	0.134**	0.150**	0.147**	0.143**	0.140**	0.137**
Size	0.082**	0.091**	0.089**	0.087**	0.085**	0.084**
Year-effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry-effects	Yes	Yes	Yes	Yes	Yes	Yes
Arellano-Bond (AR1)	Pr > z = 0.001	Pr > z = 0.009	Pr > z = 0.001	Pr > z = 0.003	Pr > z = 0.004	Pr > z = 0.004
Arellano-Bond (AR2)	Pr > z = 0.122	Pr > z = 0.131	Pr > z = 0.122	Pr > z = 0.185	Pr > z = 0.192	Pr > z = 0.1586
Sargan test (Chi-square, p-value)	4.61 (p = .001)	5.20 (p = .001)	5.31 (p = .001)	5.03 (p = .001)	4.28 (p = .001)	3.99 (p = .001)

Table 3 presents the findings of controlling mechanisms and their roles. Total number of observatiosn are 6,720. We use separate regression for each interaction term for more clarity in findings. Including so many interaction terms may produce biased results. Industry and year-fixed effects are included in the regressions. ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively.

In column 1, we regress interaction terms between CEO psychological biases and board independence to test our hypotheses 4a. The findings show that the significance level for the interaction terms between CEO narcissism and board independence decreases from 5% to 10%. Similarly, the coefficient value weakens for CEO narcissism (from β = −0.207−(−0.106) = 10.1%). The interaction term between CEO hubris and board independence is insignificant and negative. This shows that board independence only mitigates but does not substitute the negative relation between CEO psychological biases and LIVA, thus supporting hypothesis 4a. In column 2, we regress interaction terms between CEO psychological biases and gender-critical-mass to test our hypotheses 4b. The findings show the interaction terms for CEO psychological biases and gender-critical-mass is significant and positive (β = 0.299 for narcissism and β = 0.162 for hubris; p <.05: refer to column 2 Table 3). We find a strong substitution effect of gender-critical-mass for a negative association between CEO psychological biases (for narcissism and hubris) and LIVA, suggesting that gender-critical-mass dilutes the negative impacts of both CEO psychological biases on LIVA.

To test our hypothesis 5a, we rerun our model, and findings show that the coefficient values of both the interaction terms (CEO psychological biases × foreign ownership) are positive and significant (β = 0.131 for narcissism and β = 0.096 for hubris; p <.10: refer to column1; Table 3). In terms of coefficient, we find quite different outcomes as the coefficient value of both interaction terms does not improve if compared with the coefficient value of the individual impact of foreign ownership (β = 0.100 for foreign ownership; p <.01: refer to model 2 Table 3). The coefficient of the interaction term is positive but less than that of the coefficient of individual foreign ownership. Thus, foreign ownership works as a substitute, such as both CEOs’ psychological biases not increasing their positive impact on LIVA or foreign ownership significantly decreasing the negative effects of both CEOs’ psychological biases on LIVA. In other words, reducing CEO psychological biases (for narcissism and hubris) or increasing foreign ownership does not result in an optimal mix of governance mechanisms. Hence, better governance can only be achieved by increasing foreign ownership. So, our hypothesis 5a is partially supported. Further, the findings show that government ownership neither weakens nor substitutes the negative relation between CEO psychological biases and government ownership (refer to column 4; Table 3). The coefficient values and significant level do not change for both interaction terms (CEO psychological biases and government ownership). So, the findings fail to support hypothesis 5b.

Further, strategic alliance mitigates the negative relation between CEO psychological biases and LIVA. The findings show a significant decrease in coefficient value for CEO narcissism and hubris (β= −0.201−(−0.093) = 10.8%; β= −0.097−(−0.010) = 8.7%). At the same time, we only find a decrease in the significant level of CEO narcissism (from 5% to 10%: refer to column 5; Table 3). So, our hypothesis 6a is supported in the context of mitigating the negative relation rather than substitution effects. Finally, we find a strong substitution effect of group affiliation as the interaction terms between CEO psychological biases and group affiliation are positive and significant (p < .01 for both psychological biases). Hence, our hypothesis 6b is supported in terms of substitution effect (refer to column 6; Table 3).

Overall, we find mixed results. Three of six alternate controlling constructs (gender critical mass, foreign ownership, and group affiliations) serve as substitution mechanisms. In contrast, board independence and strategic alliance mitigate the negative consequences of CEO psychological biases and LIVA. However, we find no support for the role of government ownership in both contexts (weakening or substitution).

Furthermore, we regress these controlling mechanisms to provide their substitution role to avoid conflict of interest among these controlling mechanisms (refer to Table 4). The coefficients of the interaction terms between gender-critical-mass and foreign-ownership and gender-critical-mass and group-affiliation are positive and significant (p < .05; Table 4 columns 1 and 2), indicating strong substitution effects. Finally, the interaction effect between group affiliation and foreign ownership is not statistically significant, meaning there is no substitution effect. We find mixed substitution effects, with two of three interaction terms being statistically significant (gender-critical-mass x foreign-ownership and gender-critical-mass x group-affiliation).

Table 4. Substitution effects.

	Column 1		Column 2		Column 2
	Coefficient	t-stat	Coefficient	t-stat	Coefficient	t-stat
LIVA (t-1)	0.790***	5.325	0.825***	5.317	0.790***	5.059
CEO-narcissism	−0.192**	−2.149	−0.190**	−1.118	−0.192**	−2.196
CEO hubris	−0.108*	−1.725	−0.092*	−1.758	−0.108*	−1.662
Substitution effects
gender-critical mass × foreign-ownership	0.060*	1.806
gender-critical mass × group-affiliation			0.052**	2.171
Group-affiliation × foreign-ownership					−0.011	−1.180
Main variables
Gender critical mass	0.321***	4.270	0.301***	4.186	0.263***	4.447
Foreign-ownership	0.169**	2.675	0.155**	2.606	0.201**	2.110
Group-affiliation	0.174**	2.228	0.153**	2.237	0.165**	2.183
Control factors	Included		Included		Included
Year-effect	Yes		Yes		Yes
Industry-effect	Yes		Yes		Yes
Arellano-Bond (AR1)	Pr > z = 0.000		Pr > z = 0.000		Pr > z = 0.000
Arellano-Bond (AR2)	Pr > z = 0.337		Pr > z = 0.289		Pr > z = 0.196
Sargan test (Chi-square, p-value)	6.51 (p = .001)		5.05 (p = .001)		7.11 (p = .001)

We regress each interaction term separately. ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively.

Total number of observatiosn are 6,720.

7. Discussion

The existing literature mainly focuses on the role of CEO psychological biases (CEO narcissism and hubris) on firm strategic choices and short-term performance. The current study highlights the impact of these psychological biases on long-term performance. Further, the study explores the differential effects of CEO narcissism and hubris on firms’ long-term performance (Brunzel, 2021). after controlling for several CEO and firm-level factors, we find that both CEO psychological biases are negatively associated with firm long-term performance, supporting hypotheses 1a and 1b. The findings indicate that CEO psychological biases (CEO narcissism and hubris) lead to strategic choices that negatively affect the firm long-term performance in the Malaysian market. This research adds to our knowledge of how CEOs with excessive CEO psychological biases might affect their firms’ long-term success (Brunzel, 2021). In addition, we also found the differential impact of CEO psychological biases on firms’ long-term performance. We find that CEO narcissism has a comparatively more pronounced negative effect on LIVA, in line with our hypothesis 2. Narcissistic CEOs are more inclined to participate in big, dramatic, and highly visible strategic initiatives, gradually improving the status quo (Lin et al., 2022). Because of this, narcissistic CEOs frequently cause their companies to experience erratic performance. In an emerging context, CEO psychological biases (narcissism and hubris) do not contribute to the firm performance. In addition, we find that CEO-level factors moderate the negative association between psychological biases and LIVA. The findings show that CEO-chair, CEO-ownership, and CEO-gender moderate negative relations between CEO psychological biases and firm LIVA (except CEO-chair for CEO-hubris and LIVA relation). In contrast, CEO tenure mitigates the negative association between psychological biases and firm LIVA.

In the next stage, we used six mechanisms as substitution factors for a negative association between CEO psychological biases (CEO narcissism and hubris) and LIVA. We find only three out of six proposed mechanisms as substitution mechanisms (gender critical mass, board independence, and strategic alliance) for a negative association between CEO psychological biases (CEO narcissism and hubris) and LIVA. Thus, the stakeholders can curtail the negative impact of CEO psychological biases on LIVA through gender critical mass, higher board independence, and strategic alliance. The findings suggest that boards curtail the negative effect of CEO psychological when there is a reasonable gender balance- when at least three female directors are on the board. Likewise, board independence also curtails the negative impact of CEO psychological biases on LIVA. The findings show that effective corporate governance curtails the negative consequences of strategic choices made by CEOs with psychological biases (CEO narcissism and hubris) (Kouaib et al., 2022). This is in line with the view that women on corporate boards are increasingly seen as excellent practices for corporate governance and are linked to characteristics that improve the value of the company, such as a more advantageous board structure and increased board effectiveness (Kouaib et al., 2022; Lin et al., 2022). Similarly, independent directors with diverse backgrounds in industry, viewpoints, and experiences have traditionally benefited public firms. They each contribute a unique perspective to discuss the organization and problems comparable to or aligned with it. Further, curtailing CEO overinvestment might negatively impact firm performance (Lin et al., 2022). Additionally, their primary attention is always on the stakeholders. Our findings support the notion of board effectiveness in the presence of independent directors (Brunzel, 2021). We also find strategic alliance as a substitution mechanism for the negative association between CEO psychological biases and firm performance. A strategic alliance is an agreement between two businesses to work together on a project that will benefit both parties while maintaining each business’s independence. The arrangement is less complicated and restricts CEO power in strategic choices.

In contrast, government ownership doesn’t substitute/weaken the negative association between CEO psychological biases and LIVA. The government intervention, moreover, results in an unfair distribution of powers while leaving the stakeholders inadequately protected. CEOs exercise more power in these situations, which may ultimately impact the firm long-term performance. In short, government ownership renders governance mechanisms weak (Zeitoun et al., 2019). CEO psychological biases negatively affect firm performance in firms with government ownership. For further clarity, we also test the substitution role of these three mechanisms (gender critical mass, foreign ownership, and group affiliation) in model 3. The findings show that only two interaction terms are positive and significant (gender critical mass × foreign-ownership and gender critical mass × group-affiliation), suggesting that gender critical mass, foreign ownership, and group-affiliation do substitute each other in the context of CEO psychological biases and LIVA relationship. Finally, we conduct propensity matching score and alternative measure approach for CEO psychological biases¹. We obtain results identical to those reported in the main findings for both robustness tests. Further, we also split our sample into CEO turnover and non-turnover samples. We regress the confined sample, and our conclusions are mainly robust to the main reported results. For brevity, we do not show the findings in our main article.

8. Contributions and future research

The current study makes several contributions to the existing literature. First, the study investigates the impact of CEO psychological biases on firm performance in an emerging context. CEOs are more potent in an emerging context, and their role in strategic decisions is more pronounced. The current study’s findings align with the argument that CEO psychological biases negatively affect firm performance. Second, we provide evidence regarding the moderating role of the CEO’s other attributes. So far, empirical findings regarding the role of CEO attributes are lacking. Centered on CEO-board power dynamics, we introduce a set of CEO-level factors that amplify (CEO-chair, ownership, and gender) or buffer (CEO-tenure) a detrimental effect of CEO psychological biases on corporate performance. The findings suggest that the negative impacts of CEO psychological biases are highly correlated with power imbalances (CEO-chair and ownership). Therefore, power dynamics must be considered in a broader context in emerging economies.

Contrary to earlier findings (Hiller & Hambrick, 2005), the current study examines potential boundary conditions of the impact of CEO psychological biases on firm performance. Therefore, the study develops a theoretical framework for CEO psychological performance linkages. It is adequately detailed to convey its intricacy and revealing enough to concentrate on the feasibility of future CEO psychological biases-performance analytical models. Third, the study proposes an alternative mechanism that mitigates/substitutes the negative association between CEO psychological biases and firm performance. These findings significantly contribute to the existing literature by highlighting the alternative mechanism to control the negative consequences of CEO psychological biases. So far, this is the primary study in this context that proposes different mechanisms to mitigate the negative effects and guides the stakeholders to tackle the challenges. Lastly, we provide evidence in the transition economy (Malaysia) context, whereas the prior empirical studies mainly focused on the Western context.

Regardless of the significant contributions, the study acknowledges some limitations in presenting fruitful avenues for prospective research. First, our research is limited to firms listed on Bursa Malaysia. The findings may not be generalized for unlisted or private firms. In Malaysia, there is a significant number of private firms. Second, although we technically tried to solve potential endogeneity issues in our study, we cannot completely rule out this. There is a possibility that certain types of CEOs are attracted to firms with definite characteristics that suit them. To address the potential endogeneity concerns, we conducted an endogeneity check. Yet, we concur that a better research design should exploit a state where the appraised CEOs are casually allocated to the firms.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Saif-Ur Rehman

Saif-Ur Rehman is currently an Associate Professor at Canadian University Dubai, School of Management with 8-year of corporate experience and 22-year academic experience. He holds a PhD in Management Sciences, and he received Post doctorate as a professional researcher from Nyenrode Business Universiteit, The Netherlands. He has 22-year academic experience in which he has published over 90 research papers in peer-reviewed journals mostly Scopus and WOS indexed. Current research areas are both fundamental as well as applied which include – but not limited – Global Business Strategy, Operations Management, Supply Chain Operations, Corporate Governance, and other applied research in management.

Rachid Alami

Rachid Alami is the Associate Dean of Graduate School for the MBA and MITM Programs. Dr. Rachid obtained his PhD and MBA from Paris Dauphine University. He is certified in Leadership and Executive Coaching from MIT Boston and Cergy University. Recently, Dr. Rachid obtained a master’s degree in Positive Psychology from Anglia Ruskin University in Cambridge and Post Graduate certificate in Applied Research in Education from UCL London.

Naseem Abidi

Naseem Abidi is Professor and Dean-School of Business, Skyline University College, Sharjah, UAE. Dr. Naseem Abidi has more than three decades of work experience as Government official, faculty member and academic administrator in leading Business Schools in India, UK and UAE. He holds double Master’s Degree, and Doctoral Degree in Future Studies. He has published articles in reputed journals and supervised doctoral theses.

Notes

1 We conduct both test and our findings robust. For brevity, we did not provide the results.

Appendix A:

Variables measurements

Table

Variables	Measurement
LIVA	The complete database is available on WRDS (Wharton Research Data Services) and the website www.liva-measure.com.
Market intensity	Market intensity is measured as the ratio of advertising expenses to total sales.
ROA	Profit divided by total assets.
Acquisition	The number of acquisitions represents the number of the previous year’s investments.
Strategic Alliance	A dummy variable equals one if a firm has a strategic alliance; otherwise, it is 0.
Articles	The count of news articles covering CEOs in a specific year.
Board-independence	The ratio of independent to dependent directors
CEO-ownership	Percentage of shares held by CEO
Financial leverage	Debt to debt-to-equity ratio of the firm
Foreign ownership	Percentage of shares held by foreign
Group affiliation	A dummy variable equals 1 if a firm has group affiliation; otherwise, it is 0.
Government ownership	Percentage of shares held by government
Gender critical mass	A dummy variable equals 1 if a firm has three or more females on its corporate board; otherwise, 0.
Gender diversity	A dummy variable equal to 1 has a female on its corporate board; otherwise, 0.
CEO tenure	Number of years CEO serving in a specific firm
CEO-chair	The dummy variable equals 1 if the CEO exercises dual roles; otherwise, 0.
Firm age	Difference between a year of incorporation and a year of observation
Size	Log of total assets

Appendix B:

Sample description (firm-year observations)

Table

Description	Observations
Total firm’s year observations (784 firmsx12 years)		9408
Less Financial firm-year observations (39 firmsx12 years)	(468)
Delisted firm-year observations during the period	(734)
Firms with CEO turnover of less than three years-observations	(284)
Firms with missing data	(1202)	(2688)
Total number of observations (560 firmsx12 years)		6720
Gender diversity Firm year-observations	5288
Gender critical mass firm year-observations	914
CEO- chair firm year-observations	1398
Strategic alliance firm year-observations	416
Group-affiliated firm year-observations	786

The Table presents the criteria used to finalize the sample. We excluded all financial firms. We further excluded CEO turnover cases for less than three years. Additionally, we showed gender-critical mass firms’ year-observations for the sample period.