The interplay of CFOs and CEOs with regard to investment efficiency – A regulatory focus perspective

Abstract

Recent literature suggests that CFOs’ responsibilities go beyond corporate accounting and involve increasingly strategic areas such as corporate investment decisions. However, CFOs may not directly oversee these investment decisions, but contribute indirectly by advising and guiding the CEOs. Based on this, we analyze the interaction between CFOs and CEOs to better understand their influence on corporate investment decisions. We draw on regulatory focus theory to derive hypotheses on their interaction. We predict that a CEO’s promotion focus (i.e., striving for gains and desiring advancement and growth) is positively associated with excessive investment spending and expect that this tendency can be mitigated by a CFO’s prevention focus (i.e., avoiding losses and desiring stability and security). We test these predictions empirically on a large longitudinal sample of 3,738 firm-years between 2005 and 2014. Our results document a positive impact of a CEO’s promotion focus on overinvestment and the proposed negative moderation of a CFO’s prevention focus on this relationship. Moreover, additional tests indicate a positive impact of a CEO’s promotion focus on firm performance that is amplified by a CFO’s prevention focus.