CEO Affective States and Firm Performance

ABSTRACT Even though the effect of CEO personality on business aspects like leadership and organizational culture has been studied in small and medium‐sized enterprises (SMEs), its effect on performance in emerging economies remains vague in literature. This study seeks to examine the influence of CEOs’ affective states on the financial performance of SMEs, specifically within the framework of an emerging economy. A sample of SMEs from Chile in 2017 is analysed. Employing ordinary least squares (OLS), propensity score matching (PSM) and bootstrap regression techniques, we argue that CEOs’ negative affective states significantly impair corporate performance. Contrary to predictions, our results show that CEOs’ favourable affect varies with financial performance. This difference in impact between positive and negative affective states sheds light on how CEO attributes affect SME performance. Our research illustrates an association between the profitability of SMEs, the individual characteristics of CEOs and their affective states, increasing the empirical evidence on a topic that has been relatively understudied. Our findings would help decision makers, institutions and managers to improve their understanding of the factors that influence the financial profitability of firms and thereby sustain their development over time.