CEO Risk Preference and Investing in R&D
Abacus - A Journal of Accounting Finance and Business Studies, Forthcoming
55 Pages Posted: 17 May 2014 Last revised: 3 May 2016
Date Written: July 22, 2014
Abstract
This study aims at (1) developing an index to measure CEO risk tolerance using publicly available data, and (2) examining the association between this index and investment in risky projects. Using relative pay-at-risk as a proxy for risk preference (tolerance) is a new proposition and is supported by having significant association with CEOs’ socio-demographic variables – the variables often studied in connection with risk aversion. Furthermore, this risk preference indicator has a positive association with risk taking behavior as proxied by R&D expenditures. The in-sample estimation and out-of-sample predictions support (a) using relative pay-at-risk as a valid proxy for risk tolerance, and (b) finding statistically significant positive association between this measure and R&D expenditures. The association has different degrees of strength for nine out of eleven industries.
Keywords: Determinants of R&D; Risk Aversion; Risk Tolerance; Risky Investments; Incentive Pay
JEL Classification: D81; M52; O30; O31; M21; M40
Suggested Citation: Suggested Citation