The Effect of CEO Regulatory Focus On Changes to Investments in R&D
Richard B. Scoresby, Michael C. Withers, and R. Duane Ireland
kHUB post date: March 31, 2022
Originally published: July 19, 2021 (PDMA JPIM • Vol. 38, Issue 4 • July 2021)
Read time: 40 minutes
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Research and development (R&D) is a key contributor to organizations’ pursuit of innovation. In turn, CEOs can influence important decisions related to changes in R&D spending—the kind of spending with the potential to lead to innovation. We seek to understand the motivation and conditions under which CEOs may influence R&D spending changes. Drawing on regulatory focus theory, this study investigates how CEO motivation affects changes in firm R&D spending. We explore the effect of CEO promotion and prevention foci on yearly R&D increase. We use a panel dataset of 688 S&P 1500 firms to test our hypotheses. Our findings suggest a negative relationship between CEO prevention focus and R&D increase, while CEO promotion focus produces no meaningful effect. We further test CEO compensation as a moderating mechanism, testing both incentive and fixed CEO compensation. We find that incentive compensation negatively moderates the relationship between CEO promotion focus and R&D increase, and positively moderates the relationship between CEO prevention focus and R&D increase. Additionally, CEO fixed income negatively moderates the relationship between CEO prevention focus and R&D increase. Based on these results we discuss theoretical implications of our findings, including differing effects of CEO regulatory focus on firm risk-taking behavior and how compensation packages may alter those effects. We further discuss the practical necessity for boards of directors to understand both the R&D goals of an organization and the individual motivational orientation of CEOs when crafting compensation packages.
- CEOs view the risk associated with change in R&D spending differently based on their motivational orientation.
- Boards of directors should seek to understand the motivational orientation of CEOs.
- Incentive compensation packages should reflect both the goals of the organization and the motivational orientation of the CEO.
- CEO Promotion focus is negatively associated with changes in R&D spending.
- CEO prevention focus has no effect on changes in R&D spending.
- Incentive compensation moderates the relationship between regulatory focus and changes in R&D spending.