Emotional Rollercoaster: The Inverted U-Shaped Relationship between CEO Emotions and Innovation Outcomes

While the literature suggests that CEOs’ emotions can affect organizational decision-making, leadership, and employee engagement, we know little about how they influence firms’ culture and outcomes of innovation. Acknowledging that innovation is a critical element for long-term success, we investigate the relationship between CEO emotions and firm innovation. The results of our analysis of 1,903 firm-year observations supports our theorizing of an inverted U-shaped relationship between CEO emotions and innovation outcomes. The findings show that moderate levels of emotions lead to the highest innovation outcomes, while extremely high or low levels decrease innovation. This study contributes to the literature by applying the Yerkes-Dodson law within upper echelon theory, demonstrating a non-linear relationship between CEO emotions and innovation, and utilizing a novel algorithm to measure CEO emotions more objectively.