The effect of CEO incentives on deviations from institutional norms in foreign market expansion decisions: Behavioral agency and cross-border acquisitions

CEO incentives have been the subject of great interest for human resource scholars. We explore the institutional context within which the CEO makes sense of their incentives. Our theory suggests that CEO equity incentives interact with institutional norms to influence foreign market entry choices. Specifically, we argue that CEOs will weigh the risk bearing created by equity incentives, along with the consequences of legitimacy loss, when deciding whether to deviate from institutional norms when internationalizing. In doing so, we advance human resource literature by demonstrating that CEO responses to incentives are influenced by institutional norms and that CEOs' decisions to deviate from institutional norms are shaped by their incentives. We find support for our framework in the analysis of the stake taken by acquirers in 4,184 cross-border acquisitions

CEO equity risk bearing and strategic risk taking

__Research Summary:__ We draw upon applied psychology literature to explore interagent differences in perceived risk to their equity when making strategic risk decisions. Our theory suggests behavioral agency's predicted negative relationship between equity risk bearing and strategic risk taking is contingent upon four personality traits. Our empirical analyses, based on personality profiles of 158 Chief Executive Officers (CEOs) of S&P 1,500 firms in manufacturing industries, indicate the relationship between executive risk bearing and strategic risk taking crosses from negative to positive for high extraversion, greater openness, and low conscientiousness. These findings demonstrate that agency based predictions of CEO risk taking in response to compensation—and board attempts at creating incentive alignment using compensation—are enhanced by integrating insights from personality trait literature. __Managerial Summary:__ We study the effect of CEO personality on their behavioral responses to stock option pay. Our findings reveal that CEOs that score high on extraversion or openness and low on conscientiousness are less likely to decrease their firm's strategic risk taking as the value of their stock options increases. That is, the tendency of CEOs to become more risk averse in their strategic choices as their option wealth increases (due to loss aversion) is weaker for highly extraverted and more open CEOs, but stronger for more conscientiousness CEOs. Overall, our findings suggest that board of directors need to consider personality traits of their CEOs when designing compensation packages with the intention to align incentives of CEOs with shareholder risk preferences

Negative Incentives and Regulatory Capture: Noncompliance with Price Ceilings on Essential Medicines in India

Nonmarket scholars have paid limited attention to noncompliance as an alternative strategy to capture regulators; yet noncompliance is particularly consequential given its potentially significant negative externalities. We exploit rich data on price ceilings introduced in India in 2013 on 255 essential medicines to test whether noncompliance by other firms drives the focal firm's noncompliance decision. Our results indicate that noncompliance by other firms, particularly those with larger products in the market, is positively associated with a focal firm's noncompliance. The focal firm's scope and sales positively moderate this relationship. Overall, our study indicates that firms are more likely conclude that the potential benefits of regulatory capture using negative incentives outweigh the potential financial and social costs in the presence of a greater number of firms that are already noncompliant. As such, our study draws attention to negative incentives as an important yet largely overlooked nonmarket strategy

Capital Market Liability of Foreignness of IPO Firms

This study contributes to the capital market liability of foreignness (CMLOF) literature. Utilizing the context of foreign IPO firms, we investigate how long CMLOF lasts, if CMLOF turns into capital market advantage of foreignness (CMAOF) over time, if the global financial crisis influences CMLOF, and how some firms mitigate CMLOF after IPO. Utilizing an explanatory sequential mixed methods design, we quantitatively analyze 549 foreign IPO firms and qualitatively analyze 1233 units of data and show quantitatively that CMLOF does diminish after one year and turns into CMAOF after 3 years for IPO firms and qualitatively reveal strategies to mitigate CMLOF

Frequency of International Expansion through High Control Expansion Modes and Interlocked Directorships

This study investigates director interlock as a mechanism by which an MNC learns and adopts high control market expansion modes that other MNCs use. Using data on greenfields and acquisitions by S&P 500 firms in the period 2003–2010, we find a significant relationship between the use of high control market expansion modes by interlocked MNCs and the frequency of international expansion of a focal MNC through such modes in unrelated industries, with the relationship stronger for the depth of interlocked director experience. The findings contribute to the literatures around the frequency of international expansion and microfoundations of international strategy

Behavioral Agency and the Efficacy of Analysts as External Monitors: Examining the Moderating Role of CEO Personality

We integrate behavioral agency research and the five-factor model of personality to re-visit investment analysts' efficacy as a mechanism for reducing agency costs. We highlight the role of personality in shaping how CEOs respond to analyst recommendations, leading to boundary conditions for the efficacy of analysts as external monitors. We theorize that the extent to which a CEO perceives a threat from more positive analyst recommendations is contingent upon their personality, which shapes their subjective interpretation of the recommendation and their use of income-increasing earnings management in response. Our findings suggest that personality is critical to understanding how CEOs respond to external monitors and the agency costs associated with the positive analyst recommendations

The Effect of Incoming Board Interlocks With Public Firms on Private Firms’ Survival: Large-Scale Evidence From India

How private firms can overcome their unique governance challenges remains an important but understudied topic. Using novel data on more than 28,000 private firms in India from 1988 to 2017, we examine whether private firms can improve their survival prospects by having board interlocks with public firms and, specifically, interlocks whereby a public firm director subsequently joins the private firm's board. In our data, we found a U-shaped relationship between the number of incoming board interlocks and the probability of private firm exit. We also found that board interlocks formed by public firm directors of public firms audited by Big Four companies improve private firms’ survival more than other interlocks, consistent with the notion that such interlocks improve monitoring at private firms. Overall, our study points toward the importance of considering the role of incoming board interlocks when explaining private firm survival

Adapting to Grand Environmental Challenges through Collective Entrepreneurship

Businesses are increasingly participating in cross-sectoral partnerships to reduce their environmental impacts on society. At the same time, some are pursuing more entrepreneurial ventures to stimulate environmental innovations. Environmental issues, however, are evolving into grand challenges that could create massive disruptions to organizational and societal systems that transcend the interests or influence of individual firms. As such, successful adaptation to these challenges will require innovative solutions that leverage the resources and capabilities of all relevant actors. Drawing from research on cross-sectoral partnerships and environmental entrepreneurship, we propose collective environmental entrepreneurship (CEE) as a strategy to facilitate adaptation to changing global ecosystems. We explain how cross-sectoral partnerships can overcome some of the constraints facing individual sectors in developing innovative adaptations to grand environmental challenges by pursuing CEE. Further, we show how these initiatives can institute governance arrangements that help individual sectors reconcile their diverging interests. We then apply these insights to three cases where governments, private interests, and nonprofits have collaborated to adapt to the physical impacts of climate change through innovative partnerships and draw implications for how this construct could be applied to other global challenges facing society

The Interactions of Institutions on Foreign Market Entry Mode

This paper examines the interaction effects of institutional differences in the cognitive, normative, and regulatory domains on cross-border acquisition and alliance formation. Using a sample of 673 cross-border acquisitions and alliances conducted by multinational corporations (MNCs) from the manufacturing sector of six emerging economies (EEs) over the period 1995–2008, we find significant mimicking (cognitive domain) of local firms' choice of ownership modes by EE firms. We also find that regulatory distance (regulatory domain) moderates the mimicking of both foreign and local firms while normative distance does not have any moderating effect. These findings contribute to our understanding of how EE MNCs mimic ownership modes in foreign market entry and how the interaction of this mimetic tendency with other institutional pillars affects these decision