Su, Jiaoyue
(2024)
Managers’ career concerns and firm R&D investments: the case of emerging market firms.
PhD thesis, University of Nottingham.
Abstract
Investments in R&D are critical for firms to build competitive advantage and achieve sustained long-term growth. As such, scholars have long interested in understanding the role of CEO characteristics in determining R&D investments. While existing studies have focused on explicit CEO incentives from compensation contracts, there is a lack of understanding of how CEOs’ implicit incentives tied to career concerns influence R&D investment decisions. Also, previous studies emphasize CEOs’ career concerns in the context of US firms. Emerging markets, such as China, have different characteristics in terms of the managerial labor market and institutional environment, resulting in distinct incentives for CEOs, yet research in this area remains scarce. This thesis seeks to address these gaps and advances the literature.
It is structured into three interrelated but distinct essays, each employing different theoretical lens – agency theory, prospect theory, and tournament theory – to support the development of the arguments. Thesis theories are instrumental in revealing the intricate relationship between CEOs’ career development and concerns and their R&D investment decisions. It focuses three topics: (1) the impact of CEOs’ political promotion on firms’ investments in R&D; (2) how CEOs’ career horizons affect R&D spending strategies of firms; and (3) how CEOs’ political ranks affect firms’ R&D investment decisions. The research adopts quantitative research methods with hand-collected data and information from the CSMAR database in the context of China, one of the largest emerging markets. The Ordinary Least Squares (OLS), fixed effects models, and 2-stage least squares method with instrumental variables are used to analyze the data. A series of robustness checks are conducted to validate the findings, further strengthening the reliability of our research results.
This thesis finds that the likelihood of a CEO’s promotion to either government ranks or the (Communist) party head position of the company results in a decrease in R&D investment; conversely, institutional ownership and industry dynamism neutralize this negative effect (Section 2). This research also reveals that CEOs with shorter career horizons are less likely to make R&D investments compared to those with longer career horizons; this horizon problem is mitigated by institutional ownership, but it is reinforced by compensation incentives originating from within-firm pay disparity and personal wealth of CEOs (Section 3). Finally, this thesis finds that managers with relatively lower political ranks in the tournament tend to favor R&D investments, but this tendency is dependent on the levels of industrial competition, regional institutional development, and managers’ career horizons (Section 4). This study not only advances the understanding of what determines a firm’s R&D investments by highlighting the role of CEOs’ career concerns, but also provides valuable insights for boards, policymakers, and practitioners in monitoring managerial behavior and facilitating effective R&D investment strategies.
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