How do CEOs matter? The moderating effects of CEO compensation and tenure on equity ownership in international joint ventures

Abstract

We propose that CEO compensation and tenure moderate the relationship between multinational corporations' (MNCs) R&D intensities and their percentages of equity ownership in international joint ventures (IJVs). Transaction cost economics (TCE) suggests a positive relationship between MNC R&D intensity and IJV equity ownership, but this relationship has not been confirmed consistently in prior research. We examine the moderating effects of CEO compensation and tenure on the relationship between MNC R&D intensity and IJV equity ownership, thereby bringing more nuanced explanations from agency theory and upper echelons theory into the discussion. Our proposed relationships were tested using a sample of 202 IJVs formed between U.S. MNCs and foreign partners in high-tech industries for the period 1993 to 2003. We found an overall positive relationship between MNC R&D intensity and the percentage of equity ownership in IJVs. Moreover, CEO tenure and bonus compensation each weaken the positive R&D intensity-equity ownership relationship in our sample, while CEO stock options compensation amplifies it. These findings indicate that CEO compensation and tenure influence decision making about equity ownership in IJVs, suggesting that scholars and boards of directors should consider these CEO-related factors when evaluating strategic decisions regarding IJVs.