Seeking pleasure or avoiding pain: Influence of CEO regulatory focus on firms' advertising, R&D, and marketing controversies
Introduction
Scholars of upper echelon theory (Hambrick & Mason, 1984) have highlighted that Chief Executive Officers' psychological traits such as their narcissism, hubris, and overconfidence play a pivotal role in shaping firm strategy and performance (Chen, Cross, & Luo, 2015; Hayward & Hambrick, 1997; Zhu & Chen, 2015). A key psychological trait related to CEOs' goal orientation that has recently gained the interest of upper echelon researchers is their regulatory focus (e.g., Hmieleski & Baron, 2008; Tumasjan & Braun, 2012): an attribute reflecting the motivation individuals have for attaining gains (promotion focus) and avoiding losses (prevention focus). Given that CEOs' regulatory focus is directly related to their motivation under uncertainty, researchers expect it to have a critical impact on CEOs' choices, particularly those involving highly uncertain gain-loss outcomes (Gamache, McNamara, Mannor, & Johnson, 2015; Wowak & Hambrick, 2010). Indeed, recent research demonstrates that CEOs' regulatory focus impacts such key corporate choices as firm acquisitions (Gamache et al., 2015), leadership style (Stam, Van Knippenberg, & Wiesse, 2010), and contract framing (Weber & Mayer, 2011). Surprisingly, despite CEOs also taking an active part in strategic marketing choices (Kashmiri & Mahajan, 2017), a number of which involve a trade-off between gain-maximization and loss-avoidance, research investigating the effect of CEO regulatory focus on firms' strategic marketing behavior remains scant. This omission means that the impact of CEO regulatory focus on firms is potentially understated.
Two key elements of a firm's marketing strategy that each require managers to make a trade-off between attaining gains and avoiding losses are investments in advertising and R&D (Mizik & Jacobson, 2003). Advertising investments present significant growth opportunities by building brand equity (Mizik, 2010), and R&D investments promise strong competitive advantages by helping launch successful new products (Krasnikov & Jayachandran, 2008; Srinivasan & Hanssens, 2009). However, both these investments are highly risky with their returns being highly uncertain (Currim, Lim, & Kim, 2012; Joshi & Hanssens, 2010). Researchers have also established that marketing controversies significantly hurt firms' financial performance (Ahluwalia, Burnkrant, & Unnava, 2000; Dawar & Pillutla, 2000), highlighting the need for investments in control systems aimed towards avoiding these controversies. However, given firms' resource constraints, how much a CEO prioritizes such loss-avoidance investments relative to investments in growth-generating projects is again likely to be influenced by the relative importance the CEO places on avoiding losses versus obtaining gains. Yet, despite the monumental impact of advertising, R&D, and marketing controversies, and despite these outcomes inherently involving trade-offs between attaining gains and avoiding losses, scholars have not investigated the role of CEO regulatory focus as a possible antecedent of these outcomes, leading to calls for such an investigation (Gamache et al., 2015).
In light of the existing research gaps, we investigate whether CEOs' regulatory focus impacts firms' advertising intensity, R&D intensity, and likelihood of getting involved in marketing controversies. We also investigate whether factors related to corporate governance and industry environment moderate the impact of CEOs' regulatory focus on these strategic marketing variables. As Fig. 1 reveals, we predict that firms whose CEOs are predominantly promotion-focused (i.e., whose CEOs have greater degrees of promotion focus relative to prevention focus) are likely to make greater investments in advertising and R&D. However, such firms are also more likely to get involved in marketing controversies. We also posit that CEO regulatory focus is likely to have a more meaningful impact on these marketing outcomes when the CEO has high power, when stock options comprise a relatively small proportion of the CEO's compensation, and when the firm operates in highly dynamic environments. Our empirical study of 395 CEOs belonging to large publicly listed U.S. firms supports most of our hypotheses. Our results are, on the whole, robust to the use of alternative regression techniques, and to concerns of sample selection bias, endogeneity, serial correlation, heteroscedasticity, and outliers.
Our research makes a number of important contributions to existing research. First, we add to upper echelon literature by theorizing and finding empirical support that the impact of CEOs' regulatory focus extends not only to corporate policies such as mergers and acquisitions, as found by prior scholars (e.g., Gamache et al., 2015), but also to a number of key strategic marketing outcomes in which CEOs may or may not be directly involved.
Second, researchers studying myopic management (i.e., the practice of managers making lower advertising and R&D investments than is justified from a value-maximization perspective) and marketing controversies (e.g., Kashmiri & Brower, 2016; Mizik, 2010) have called for an investigation on the antecedents of these important outcomes. We answer the call of these researchers by highlighting a key psychological antecedent of these outcomes. In doing so, our research promises to help board members understand where they need to focus in their efforts to decrease the incidence of myopic management and controversial marketing behavior.
Finally, unlike previous researchers who have investigated the main effects of CEOs' personal characteristics (e.g., Hutton, Jiang, & Kumar, 2014), corporate governance factors (e.g., Finkelstein & D'Aveni, 1994), and environmental factors (e.g., Dess & Beard, 1984) on firm outcomes, we reveal how a key CEO psychological characteristic works in tandem with factors related to corporate governance (CEO power and CEO compensation structure) and firm environment (industry dynamism) to shape firms' strategic marketing behavior. In doing so, we provide a nuanced understanding to board members and compensation committees on factors they can use to monitor and control the marketing impact of CEOs' regulatory focus.
Section snippets
Regulatory focus theory
According to regulatory focus theory (Higgins, 1997), two distinct motivational systems influence how individuals approach pleasure and pain: promotion focus and prevention focus. An individual's degree of promotion focus refers to the individual's level of motivation to focus on advancement and growth, while an individual's degree of prevention focus refers to the individual's level of motivation to avoid losses and ensure safety (Higgins, 1997).
Prior research suggests that promotion and
Sample
We tracked the performance of a sample of 395 large publicly listed U.S. firms, annually across 5 years (2006–2010). We reached our sample by first considering all firms in the ExecuComp and WRDS GMI Ratings databases that appointed a new CEO in the year 2003–2005. This resulted in an initial sample of 890 firms. We then restricted ourselves to firms whose CEO did not change during the period of observation (2006–2010), resulting in a final sample of 395 firms. We restricted our analyses to
Analysis of selection model
Table 3 presents the result for our selection model. The Wald test shows good model fit (χ2 (13) = 304.8, p < .01). Younger (p < .05), more globalized (p < .01), less diversified (p < .01) and larger (p < .01) firms, firms whose CEOs were male (p < .10), firms whose CEOs were younger (p < .01), and those whose CEOs had higher stock option-compensation ratios (p < .01), had a higher likelihood of continued CEO presence, and therefore were more likely to be selected.
Analysis of differences in advertising intensity
The results of our GLS random
Discussion and implications
Our results suggest that firms whose CEOs are predominantly promotion-focused tend to have higher levels of advertising and R&D intensities. On the other hand, firms led by such CEOs are also more likely to get involved in marketing controversies. The impact of a CEO's regulatory focus is, on the whole, strengthened when the CEO has high power and low stock option-compensation ratio, and when the firm operates under high environmental dynamism.
While we found support for most of our hypotheses,
Saim Kashmiri is an Associate Professor of Marketing at the University of Mississippi. Prior to joining Ole Miss, he earned a Bachelor's degree in Chemical Engineering from the Massachusetts Institute of Technology (MIT), an MBA from the Lahore University of Management Science (LUMS) and a PhD in Marketing from the University of Texas at Austin. Dr. Kashmiri has worked for around six years in Global Fortune 500 firms such as Shell Oil, Procter and Gamble, and Nestlé, in brand management
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Saim Kashmiri is an Associate Professor of Marketing at the University of Mississippi. Prior to joining Ole Miss, he earned a Bachelor's degree in Chemical Engineering from the Massachusetts Institute of Technology (MIT), an MBA from the Lahore University of Management Science (LUMS) and a PhD in Marketing from the University of Texas at Austin. Dr. Kashmiri has worked for around six years in Global Fortune 500 firms such as Shell Oil, Procter and Gamble, and Nestlé, in brand management positions. His current research interests are in the areas of marketing strategy, brand management, innovation, and marketing-finance interface. His research has been published in the Journal of Marketing Research, Journal of the Academy of Marketing Science, International Journal of Research in Marketing, Journal of Business Ethics, Journal of Business Research, Harvard Business Review (Blog), and the Marketing Science Institute working paper series. He serves on the Editorial board for Journal of Business Research and Marketing Education Review, and also serves as an Ad-hoc reviewer for the Journal of Marketing, International Journal of Research in Marketing, Journal of Business Research, Journal of Public Policy & Marketing, and Asian Case Research Journal.
Prachi Gala is an Assistant Professor at Elon University. Prior to joining Elon University, she earned a Ph.D. in marketing at the University of Mississippi. Her research interests lie in marketing strategy and marketing-finance interface. She is particularly interested in exploring the role of corporate governance and top management team factors on firms' financial performance. Some of her recent accomplishments include (1) Receiving the Best paper award in the Marketing Strategy track in Society of Marketing Advances, 2016 (2) Winning the William O. Bearden Award for Best Doctoral Student research at the Southeast Marketing Symposium, 2017 (3) being selected as a Doctoral Fellow to represent University of Mississippi at AMA Sheth Foundation Doctoral Consortium, 2017 (4) being selected as a Doctoral Fellow to represent University of Mississippi at SMA Doctoral Consortium, 2015, and (5) being selected to present her best teaching moments at the SMA conference, 2016.
Cameron Duncan Nicol is an Assistant Professor of Marketing at Union University in Jackson, Tennessee. Prior to joining Union University, he earned a Ph.D. in marketing at the University of Mississippi. His research areas lie in marketing strategy, top management teams, retail strategy, and sales. Two of his papers that he worked on as a Ph.D. student have been published in the Journal of the Academy of Marketing Science. He has presented his work at a number of conferences including the AMA educators' conference and the Southeast Marketing Symposium. He received his MBA and MAED from Union University. Before joining academia, he worked in retail sales for Verizon Wireless, a leading national retailer of wireless communication.