CEO Risk Preference and Investing in R&D

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 variablesthe variables often studied in connection with risk aversion. Furthermore, this risk preference indicator has a positive association with risk-taking behaviour 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 11 industries.