CEO Risk Preference and Investing in R&D |
| |
Authors: | A Rashad Abdel‐Khalik |
| |
Institution: | College of Business, University of Illinois |
| |
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 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. |
| |
Keywords: | Determinants of R&D Incentive Pay Risk Aversion Risk Tolerance Risky Investments |
|
|