Promote or prevent? A regulatory focus perspective on managerial risk taking
Related Experiment Videos
Amadeusz Jacek Miązek1, Justyna Światowiec-Szczepańska2
1Department of Management Accounting, Poznań University of Economics and Business, Poznań, Poland.
Abstract:
This study examines the heterogeneity of CEOs' risk attitudes and how fixed versus variable compensation components shape their strategic risk-taking, as part of corporate governance policy. Building on psychological Regulatory Focus Theory (RFT) and established management frameworks, we developed a conceptual model with six hypotheses. We applied a validated Polish Linguistic Inquiry and Word Count (LIWC) dictionary to measure CEOs' promotion and prevention focus through content analysis of their shareholder letters. Our dataset covers 82 companies listed on the Warsaw Stock Exchange (WSE) from 2011 to 2020, analyzed using longitudinal panel data. The results confirmed that a CEO's regulatory focus is a significant motivational factor in strategic risk-taking. Promotion-focused CEOs tend to pursue bolder, riskier decisions, increasing the firm's strategic risk, whereas prevention-focused CEOs are more cautious and inclined to mitigate risk, aligning with prior findings in the literature. Moreover, these relationships are moderated by compensation structure. Higher fixed salaries are associated with reduced strategic risk, reinforcing risk aversion, while larger annual bonuses are associated with greater risk-taking. In particular, fixed compensation strengthened the natural risk-avoidant tendencies of prevention-focused CEOs, suggesting that higher guaranteed income reinforces a cautious strategy. Unexpectedly, large annual bonuses did not temper the risk appetite of promotion-focused CEOs; instead, bonuses amplified their risk-taking, indicating that intrinsic motivation can outweigh extrinsic incentives for risk moderation. These findings underscore the need for tailoring executive compensation policies to individual CEOs' risk preferences. Fixed salaries may temper excessive risk-taking in promotion-focused CEOs, while performance-based bonuses may motivate otherwise cautious, prevention-focused CEOs to undertake strategic risks. Such insights are valuable for refining corporate governance strategies in European public firms, especially in Poland, to better align CEO behavior with shareholder interests.
Related Concept Videos
Drug Control Governance: Regulatory Bodies and Their Impact
Coping Strategies: Problem Focused
For example, consider a student who struggles to understand their...
Framing Effects
Self-Discrepancy Theory
Types of Biopharmaceutical Studies: Controlled and Non-Controlled Approaches
Non-controlled studies, commonly employed for initial exploration, lack a control group, rendering them susceptible to biases and external influences. In contrast, controlled...
Self-Regulation