CEO Personality Traits and Firm Dynamics

Combining studies on CEO personality traits and real options theory, we propose that the firm’s strategic flexibility can be improved by CEO openness to experience but worsened by CEO conscientiousness and neuroticism. We construct the degree of strategic flexibility by exploring the firm’s ability to take advantage of heightened volatility, which results in superior stock returns. Our results suggest that adaptability is fostered by creativity and diverse thinking (openness to experience) and is impeded by rigid planning, resistance to change (conscientiousness), and lack of emotional stability (neuroticism). However, for firms that experience decreased volatility, the opposite holds. Thus, in line with trait activation theory, our results imply that the effect of specific CEO personality traits on performance is contingent and context-specific. Our findings are economically significant and have important implications concerning both CEO selection and management