CEO decision horizon and corporate R&D investments: an explanation based on managerial myopia and risk aversion

Abstract

Combining the views of managerial myopia and risk aversion, we argue that a short decision horizon could divert corporate investments away from R&D investments. We devise an industry-adjusted measurement combining CEO's expected tenure and age as a proxy for CEO decision horizon and find a positive relationship between the horizon and corporate R&D investments. The relationship is stronger among firms with lower industry-level income volatility and lower firm-level performance pressure. The results also show that CEO age is more important than CEO tenure in affecting the decision horizon. Further analyses indicate that risk aversion determines the studied relationship.

Corporate tax avoidance and corporate financialization: The moderating effect of managerial myopia

“…Previous studies show the significance of the decision horizon is driven by the CEO age factor; thus, we further examine whether the moderating effect of managerial myopia is still supported for CEO age difference (Li et al, 2021). Following Li et al (2021), we also construct the measurement of managerial decision horizon with industry‐adjusted expected decision length. CAD = CEOAGE average − CEOAGE i,t .…”

“…When tax avoidance activities are investigated and penalized by tax authorities, managers will face the risk of losing their current reputation and job (Asiri et al, 2020; Graham et al, 2014; Hsu et al, 2018). Under this circumstance, self‐serving managers are inclined to allocate cash flows generated from tax avoidance into short‐term financial assets (Armstrong et al, 2015; Li et al, 2021; Rego & Wilson, 2012). The reason is that financial assets could be easily traded in the capital markets.…”

“…Managerial myopia refers to a behavior in which managers make short‐term behaviors to satisfy short‐term financial performance maximization at the expense of the firm's long‐term development (Edmans, 2009; Ridge et al, 2014). We know that the cash flows generated by tax avoidance activities can be used for both long‐term R&D and short‐term financialized investments, while investment duration selection of firms is determined by managers' decision horizon (Benkraiem et al, 2021; Holden & Lundstrum, 2009; Li et al, 2019; Li et al, 2021). To obtain a higher valuation in the manager market, increase compensation, and build good reputation, myopic managers prefer to take certain actions to apply the tax sheltered cash flows into short‐term projects (Holden & Lundstrum, 2009; Li et al, 2021), such as tradable financial assets.…”

“…Meanwhile, short‐term projects not only help to prop up the current stock price and improve corporate performance, but also help to rapidly increase managers' current compensation and reputation (Holden & Lundstrum, 2009; Manso, 2011; Orhangazi, 2008). Conversely, the R&D activities require sustained inputs but take a long waiting period to be rewarded, which makes managers tend to invest less in long‐term projects (Asker et al, 2015; Fang et al, 2014; Li et al, 2021).…”

Innovation, external technological environment and the total factor productivity of enterprises

“…Second, we rely on the existing literature in the field of total factor productivity to select firm-level control variables, such as firm size, location of the firm and ownership identity (see, e.g., Lileeva and Trefler, 2010;Yang and Chen, 2012). Moreover, owing to the richness of the World Bank survey data, we are able to incorporate variables that refer to constraints in different dimensions faced by firms, such as financial constraint, illegal activity (see Chen and Guariglia, 2013;Liu and Li, 2017;Besley and Mueller, 2018;and Caggese, 2019) and the time that senior management spent on dealing with government regulations (see Xie et al, 2020 andLi et al, 2021). In addition, we also control for new products, which is a commonly used indicator for product innovation, to compare its impact on TFP with that of R&D investments.…”