Boards often clear a related-party transaction once it has been disclosed, reviewed, and priced on fair terms. In a recent article, we suggest that this may not be enough. The same transaction can be a sensible business arrangement under one CEO but a symptom of self-dealing under another, and part of the difference may lie in a personal trait: narcissism.
Related-party transactions have always sat awkwardly in corporate governance. A company might transact with an affiliate, a director-linked entity, or a major shareholder because the arrangement lowers costs or reflects a genuine commercial need. The same transaction might, however, move value away from outside shareholders. Disclosure rules let investors see that a transaction happened. They do not tell investors why it happened, or whose interests it served.
In our article, we ask whether the CEO’s personality helps answer that question. Narcissism is a natural place to look. It is associated with grandiosity, a strong need for admiration, and a tendency to pursue personal recognition or private advantage, all of which matter when a CEO has discretion over transactions involving people and entities close to the firm. We measure CEO narcissism using a well-established, validated metric that is widely employed in academic research (Olsen et al. 2014 ; Abdel-Meguid et al. 2021). It combines three observable indicators of CEO narcissism: the prominence of the CEO’s photograph in the annual report, the CEO’s cash compensation relative to the second-highest-paid executive, and the CEO’s noncash compensation relative to the second-highest-paid executive.
Using hand-collected related-party transaction data for nonfinancial, nonutility firms in the S&P 1500 from 2011 to 2022, we find that CEO narcissism is positively associated with a firm’s likelihood of engaging in related-party transactions. This shows up mainly in nonbusiness transactions, the kind involving directors, officers, or major shareholders rather than ordinary commercial counterparties, and the kind prior research generally treats as more prone to opportunism.
The more interesting finding is about performance, and it is not a simple story of related-party transactions being good or bad. At low levels of CEO narcissism, such transactions are associated with better firm performance, consistent with efficient contracting. At high levels of CEO narcissism, that relationship reverses. The same category of transaction, filed under the same accounting label, has a different economic meaning depending on who approved it.
This is the real point of the paper. A related-party transaction is not just a line item to be checked against disclosure rules. It is a decision made by a specific person, inside a specific governance structure, and that context shapes whether the transaction helps the firm or quietly drains value from it.
Board monitoring turns out to matter a great deal here. We find that strong board oversight mitigates the negative effect that narcissistic CEOs otherwise have on the value of these transactions. It is far less effective where board oversight is weak.
For boards and audit committees, this points to a gap in how related-party transaction review usually works. The standard checklist asks whether the transaction was disclosed, approved, and priced fairly. It rarely asks whether the CEO has the kind of profile, and faces the kind of oversight, that should make the board look harder. Our findings suggest that second question deserves a place on the checklist.
For investors, the implication is to read related-party transactions in context rather than in isolation. A small transaction can still be a warning sign if it points to weak oversight or a CEO whose incentives are not well aligned with shareholders. Size is not the only thing worth watching.
For regulators, the findings reinforce the value of disclosure while also exposing its limits. Disclosure makes a transaction visible. It does not tell you whether the transaction was efficient, and it does not, by itself, protect shareholders when the CEO has an incentive to use the transaction for personal advantage. That second part is a governance problem, not only a disclosure problem, and it needs a governance solution.
Related-party transactions tend to be treated as legal or accounting events, something to log, disclose, and move past. Our evidence suggests they are also governance events. What they mean depends not just on what was disclosed, but on who initiated the transaction, who was watching, and whether the board was strong enough to stop private incentives from overriding shareholder interests.
REFERENCES
Abdel-Meguid, A., Jennings, J. N., Olsen, K. J., & Soliman, M. T. (2021). The impact of the CEO’s personal narcissism on non-GAAP earnings. The Accounting Review, 96(3), 1-25.
Olsen, K. J., Dworkis, K. K., & Young, S. M. (2014). CEO narcissism and accounting: A picture of profits. Journal of Management Accounting Research, 26(2), 243-267.
Anwer S. Ahmed is a professor at Texas A&M University, Bilal Al-Dah is an assistant professor at Kean University, Mustafa A. Dah is an associate professor at Lebanese American University, and Moataz El-Helaly is an associate professor at the American University in Cairo. This post is based on their recent article, “CEO Narcissism and Related Party Transactions,” published in the Journal of Business Finance & Accounting and available here.