Abstract
By integrating ideas from upper echelons and relative deprivation theory, we extend the work on the microfoundations of the behavioral theory of the firm to articulate how deviations from a CEO’s personal aspirations can impact firm behavior. Specifically, we explore how CEO pay relative to peers impacts the firm’s competitive aggressiveness. We theorize that CEOs’ peer comparisons and need for visibility motivate them to chase the next higher level, suggesting that unlike firms that have relatively stable aspiration groups based on factors such as size and industry, CEOs adapt their peer groups to fit their increasing aspiration. We propose industry competitive intensity as a boundary condition to our theory, arguing that it both reduces CEO discretion over competitive repertoires and increases self-evaluation that reduces the impact of cognitive biases. Our empirical analysis of 1,536 firms and 92,018 competitive actions over a 15-year time span provided strong support for our hypotheses.
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