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

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.