The effect of misalignment of CEO personality and corporate governance structures on firm performance

We utilize the IBM Watson Personality Insights service to analyze CEOs' verbal communication during conference calls to infer CEOs' Big Five personality traits, which we employ to estimate their risk tolerance levels. We then explore whether the misalignment of CEO risk tolerance and governance structures is associated with company performance. Using a two-stage contingency approach, we test two hypotheses: (1) CEO risk tolerance and corporate governance structures are associated; and (2) misalignment of these structures with risk tolerance is negatively associated with financial performance. Based on a sample of 8208 firm-year observations during 2002-2013, we find support for both predictions. Our results support upper echelons theory and suggest that knowledge about CEOs' inherent personality traits is important and relevant for governance mechanisms to work effectively.