CEO Power Motive and Propensity for Real Options Strategy: Evidence from New Industry Entry Mode Choice between Acquisition and Corporate Venture Capital

Abstract

Real options theory posits that firms pursue a real options approach in investment to reduce uncertainty. Yet, top executives may exhibit heterogeneous motives to mitigate uncertainty. We propose that CEOs’ power motive—the motive to exert impact, influence, and control over others—can influence their uncertainty avoidance propensity and thereby affect whether they will take a real options approach in decision making. To test our argument, we consider whether firms choose to enter a new industry through acquisition (a non-real options mode) or corporate venture capital (CVC) (a real options mode). We find that CEOs with a stronger power motive are more likely to enter a new industry through CVCs rather than acquisitions. In addition, this relationship is stronger in the presence of high decision uncertainty reflected by boards’ lack of experience in the new industry and a salient threat from short sellers. This study extends real options theory by highlighting the importance of CEO power motive in shaping whether firms will adopt a real options strategy in decision making.