Business is Personal: How CEO Personality Influences Agency Costs

Corporate governance scholars have provided a host of governance mechanisms to control agency cost but have largely ignored how personality traits inherent to CEOs may influence their self-serving behavior and the resulting agency cost. In this study, we draw upon the most influential and comprehensive framework in personality psychology, the five-factor model, and theorize that more agreeable and conscientious CEOs incur lower agency cost while more neurotic CEOs incur higher agency cost. We examine the effect of these personality traits on two important manifestations of agency cost—unrelated diversification and the decoupling of CEO pay from firm performance. Using an open-language machine learning program, we operationalize Big Five personality traits of CEOs from S&P 1500 firms. We find that a CEO’s agreeableness and conscientiousness reduce agency costs, while the CEO’s neuroticism increases agency costs.