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

See all articles by A. Rashad Abdel-Khalik

A. Rashad Abdel-Khalik

University of Illinois at Urbana-Champaign - Department of Accountancy

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

Abdel-Khalik, A. Rashad, CEO Risk Preference and Investing in R&D (July 22, 2014). Abacus - A Journal of Accounting Finance and Business Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2437668

A. Rashad Abdel-Khalik (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
320 Wohlers Hall
Champaign, IL 61820
United States
217-265-0539 (Phone)
217-244-6565 (Fax)

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