The effect of CEO regulatory focus on changes to investments in R&D

Abstract 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.