CEOs on a Bed of Thorns: The Effects of the CEO Labor Market on R&D Investment in High-Technology Firms

Abstract

Previous governance research has paid little attention to the role of CEO labor markets in controlling CEO behaviors. The CEO labor market has been described as inefficient because the market is short-supplied and firms have a low tendency to hire external CEOs. With the increasing mobility of top executives among firms, however, the potential of CEO labor markets to serve as an external disciplining force has been growing. In this study, we have developed a theory on the role of the CEO labor market in disciplining CEO behavior. We argue that CEOs who are assumed to be risk-averse will actually take more risks by increasing investments in research and development (R&D) as the CEO labor market becomes more efficient. Using a longitudinal sample of high-technology firms from Standard and Poor’s (S&P) 500 firms from 2001 to 2004, we found that CEOs invest more in R&D as the supply of CEO candidates increases. We also found that the tendency of CEOs in a well-supplied CEO labor market to increase R&D investment is greater when more firms in the market are hiring external CEOs. These findings demonstrate that CEO labor markets have the potential to function as an effective external governance mechanism in controlling CEO self-serving behaviors. Our study suggests that more research on the role of the CEO labor market is needed.