How the Locus of Uncertainty Shapes the Influence of CEO Long-term Compensation on Information Technology Capital Investments

Abstract

Firms must allocate resources effectively to cope with uncertainty, which can manifest as a disruption and an opportunity. Although information technology (IT) is a means to cope with uncertainty, chief executive officers (CEOs) may not always support IT investments due to the risky nature of IT, especially when facing uncertain conditions. While prior research suggests that CEO long-term compensation positively incentivizes IT investments, little is known about how different loci of uncertainty impact this relationship. To address this research gap, we study how firm-specific uncertainty and competitive uncertainty shape the influence of CEO long-term compensation on a firm’s IT capital investment. Drawing on agency theory and prospect theory, we develop two hypotheses. First, we hypothesize that firm-specific uncertainty and competitive uncertainty positively moderate the influence of CEO long-term compensation on firm IT capital investment. Second, we hypothesize that competitive uncertainty has a stronger positive moderating effect than firm-specific uncertainty on the influence of CEO long-term compensation on firm IT capital investment. Our analysis of secondary longitudinal data from 2000 to 2007 of 357 public firms in the United States supports our hypotheses. In exploratory analyses, we found that CEO long-term compensation results in a higher risk-oriented dominant logic in the firm, particularly in conditions of firm-specific uncertainty and competitive uncertainty, with competitive uncertainty having a stronger positive moderating effect. These findings uncover risk-oriented dominant logic as a theoretical mechanism that explains how CEO long-term compensation positively influences firm IT capital investment in uncertain conditions. We also conducted exploratory analyses using a different secondary dataset of 286 U.S. public firms from 2004 to 2019 to consider firm investments in transformative IT applications and found support for our theory. This finding triangulates our results across different time periods and different types of IT investments. This study contributes to theory and practice by providing a nuanced understanding of boundary conditions surrounding CEO long-term compensation, and decisions CEOs make vis-à-vis IT capital investments.