Picture a company that does business with a firm owned by its own chief executive, or that quietly lends money to one of its directors. These arrangements are common enough that regulators have a name for them: related party transactions. Sometimes they make good business sense, securing cheaper supplies or smoother contracts. Other times they look more like a way for insiders to quietly move money in their own direction. So what tips the balance one way or the other?
A study published in the Journal of Business Finance & Accounting points to an answer that has less to do with accounting rules and more to do with personality. The researchers found that companies led by more narcissistic CEOs were more likely to enter these insider deals, and that those deals tended to hurt company performance rather than help it.
Two Ways to Read an Insider Deal
To understand the question, it helps to know what is being debated. Researchers have long held two competing views of related party transactions. One view, the conflict-of-interest hypothesis, treats them as a tool for self-dealing, a way for insiders to siphon value away from ordinary shareholders. The other, the efficient contracting hypothesis, sees them as a smart way to cut costs and reduce friction by doing business with parties a company already knows and trusts.
Both can be true depending on the deal. Earlier work split these transactions into two buckets. “Business” transactions, often with companies a firm has invested in, tend to reflect genuine operating needs. “Nonbusiness” transactions, such as loans, guarantees, or consulting arrangements with directors, officers, or major shareholders, are the ones more likely to raise eyebrows.
Anwer S. Ahmed of Texas A&M University and his colleagues at Kean University, the Lebanese American University, and the American University in Cairo wanted to know what decides which kind of deal a company pursues. Their hunch was that the answer might lie in the character of the person at the top.
Measuring an Outsized Ego
Narcissism, in the clinical sense, describes a pattern of grandiosity, a hunger for admiration, and a tendency to use situations and people for personal gain. Measuring it in CEOs is tricky, since few executives would sit for a psychological test. So researchers have developed indirect measures that read narcissism from the traces it leaves behind.
The authors used a composite score built from three signals. The first is the size of the CEO’s photo in the company’s annual report, on the theory that a leader who fills a full page with their own image is signaling something about their self-regard. The second and third compare the CEO’s pay, both cash and noncash, to that of the second-highest-paid executive. A wide gap suggests a leader who sees themselves as standing far above the rest of the team. The measure has been validated in prior research, including comparisons with assessments from analysts who had dealt with the executives directly.
The team treated narcissism as a stable trait, measuring it early in a CEO’s tenure and carrying it forward. They only recalculated the score if a CEO moved to a new company. Measuring the trait before the outcomes they studied helps reduce the worry that the deals themselves were shaping the narcissism score rather than the other way around.
Reading Thousands of Proxy Statements
Related party transactions are not neatly packaged in any financial database, so the researchers had to find them by hand. Using a Python program, they downloaded proxy statements for S&P 1500 companies from 2011 to 2022. They read through roughly 50 filings to build a list of keywords companies use to disclose these deals, then scanned the rest for matches. Research assistants reviewed each filing, with at least two people checking each one.
After excluding financial firms, utilities, and companies with missing data, the final sample came to 4,492 company-years across 824 unique firms. The team measured company performance two ways: operating profit relative to industry peers, and a measure called Tobin’s Q, which compares a company’s market value to the value of its assets and offers a rough read on how investors value the firm.
What the Numbers Showed
The first finding was that higher CEO narcissism was linked to a greater likelihood of entering related party transactions. When the researchers split the deals into the two types, the connection held for the nonbusiness, potentially opportunistic transactions but not for the ordinary business ones. In other words, more narcissistic leaders were drawn specifically toward the kinds of deals most prone to self-dealing.
The second finding concerned what these deals did to company performance. At low levels of CEO narcissism, related party transactions were associated with better performance, consistent with the efficient-contracting view. At high levels of narcissism, the same kind of deals were associated with worse performance. The relationship flipped depending on who was running the company.
The economic size of that flip was substantial. The authors estimate that for a company engaging in these transactions, a one standard deviation increase in CEO narcissism was associated with a drop of roughly 5 percent in return on assets and about 26 percent in Tobin’s Q, relative to their average values. The researchers caution that the deals themselves are often small, so this likely reflects more than the individual transactions. They interpret it as a sign that opportunistic deals tend to travel alongside other self-serving behavior, marking a broader divergence between a narcissistic CEO’s interests and those of shareholders.
One of the team’s interpretations stands out. Prior research had documented that nonbusiness related party transactions tend to drag down company value. The authors argue that this negative effect appears to be driven largely by the narcissistic personalities behind those transactions, rather than the transactions being inherently harmful in every case.
Where the Board Comes In
The third question was whether strong oversight could change the story. Corporate boards are supposed to monitor management and rein in self-serving behavior. The researchers measured board strength using five features: the share of independent directors, how much stock outside directors owned, how busy directors were with other board seats, the size of the board, and whether the CEO also served as board chairman.
Across all five measures, the pattern was consistent. Where oversight was weak, the negative link between narcissism-driven deals and performance was clear. Where oversight was strong, that negative link faded to the point of statistical insignificance. The researchers read this as evidence that capable boards can blunt the damage, steering related party transactions back toward genuine business purposes.
They also looked at director pay. When outside directors were overpaid, a condition prior work associates with cozy, less-independent boards, the harmful effects of narcissism-driven deals were more pronounced. When directors were not overcompensated, those effects were generally muted.
Caveats Worth Keeping in Mind
The authors are careful to note that this is an association study, not proof of cause and effect. Their narcissism measure, while validated, cannot capture every dimension of a complex personality trait. There is also the possibility of survivorship bias, since less narcissistic CEOs might stay in their jobs longer, though the team found no meaningful link between narcissism and tenure in their data.
For investors and board members, the work offers a way of thinking about insider deals that goes beyond the deals themselves. The same transaction can be value-adding or value-destroying, and the study suggests that the temperament of the leader approving it, along with the strength of the people watching over them, may help explain which it turns out to be.
