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CEO Risk Preference and Investing in R & D
Author(s) -
Rashad AbdelKhalik A.
Publication year - 2014
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12029
Subject(s) - proxy (statistics) , risk aversion (psychology) , preference , association (psychology) , index (typography) , investment (military) , economics , sample (material) , econometrics , actuarial science , statistics , psychology , microeconomics , mathematics , expected utility hypothesis , financial economics , computer science , world wide web , psychotherapist , chemistry , chromatography , politics , political science , law
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 CEO s' 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.