Prospective Wealth Research Articles

CEO Current and Prospective Wealth Option Compensation and Corporate Social Responsibility: The Behavioral Agency Model

This study examines the relationship between CEO options compensation and corporate social responsibility (CSR) based on the behavioral agency model (BAM). The BAM assumes that the CEO is bounded by loss-aversion behavior. Using constructs from the BAM, i.e., CEO current and prospective wealth from their options compensation, this study examines the differing effects of CEO current wealth and prospective wealth on firms’ CSR strengths, CSR concerns, institutional CSR and technical CSR. Based on a sample of 1565 U.S. firms during 1996 to 2018, the study finds that CEO current wealth is negatively related to firms’ CSR strengths and CSR concerns. The study also finds that CEO prospective wealth is positively related to firms’ CSR strengths but is unrelated to CSR concerns. CEO current wealth is negatively related to institutional CSR, whereas CEO prospective wealth is positively related to institutional and technical CSR. CEO current (prospective) wealth is more strongly and negatively (positively) related to institutional CSR than technical CSR. This study indicates that designing CEO option compensation to align top managers’ interests with the stakeholder interests requires a greater understanding of how CEO bounded rationality behavior toward loss aversion and risk taking is influenced by their option compensation.

Raising or folding the bet? Institutional dynamics, family involvement, and the mixed gamble of internationalization

AbstractRecognizing that developing economies experience various speeds of reforms and reversals, we investigate how such dynamic institutional changes influence whether firms continue expanding or begin receding from abroad, after having already internationalized. In so doing, we extend the mixed gamble perspective by showing how external institutions impact firms' mixed gamble calculus, and especially that of family versus nonfamily firms. As a result of firms' assessment of potential gains and losses in current versus prospective wealth, the speed of reforms increases while the speed of reversals decreases firms' internationalization scale. These asymmetric effects are further attenuated for firms with higher levels of family involvement.

CEO Regulatory Focus and Workplace Safety: Evidence from Plant-Level Analysis

We integrate upper echelons theory with regulatory focus theory and expand the research to examine the relationship of chief executive officers’ (CEOs’) promotion and prevention focus and workplace injuries. We develop argument that the desire for advancement and growth associated with CEOs of a high promotion focus leads to more workplace injuries while a pursuit for stability and security associated with CEOs of a high prevention focus leads to fewer workplace injuries. Based on the regulatory fit framework, we further identify the a contingent framework that identifies CEO- (i.e., incentives of current and prospective wealth associated with stock options), firm- (i.e., performance aspiration), and external capital market-level (i.e., analysts downgrades) factors which provide the boundary conditions of the effects of CEO promotion and regulatory focus on workplace injuries. Based on a sample of S&P500 firms and their plant-level injury data during the period of 2005-2011, we find general support for these hypotheses. The results highlight the important role of CEO regulatory focus and illustrate its unforeseen consequences beyond firm strategies to affect other stakeholders’ interests (i.e., employees). We discuss our contribution to strategic leadership literature as well as stakeholder literature.

How Temporal Focus Shapes the Influence of Executive Compensation on Risk Taking

The behavioral agency model (BAM) posits that executives endow current wealth, but do not endow prospective wealth. As a result of this endowment effect, executives are risk averse with current wea...

Cross-National Yardstick Comparisons: A Choice Experiment on a Forgotten Voter Heuristic

Comparing performance between countries is both a theoretically and intuitively useful yardstick for voters. Cross-national comparisons provide voters with heuristics that are less cognitively demanding, less ambiguous, and less uncertain than solely national, absolute performance measurements. We test this proposition using a unique, choice experiment embedded in the 2011 Danish National Election Study. This design allows to contrast cross-national comparisons with more traditional national sociotropic and egotropic concerns. The findings suggest that voters are strongly influenced by cross-national performance comparisons—even when accounting for classic national sociotropic and egotropic items. Specifically, voters respond strongly to how the prospective wealth of Denmark evolves relative to the neighboring Sweden. Interestingly, voters are more negative in their response to cross-national losses compared to their positive response to cross-national gains—indicating a negativity bias in voters’ preferences.

How Venture Capitalists Influence Innovation Novelty at Different Venture Stages

We explore how and under what conditions venture capital (VC) funding affects a new venture’s propensity to generate novel innovations. Drawing on behavioral agency perspective, we suggest that venture capitalists (VCs) are initially motivated to boost their prospective wealth and help their early stage venture investees to develop novel innovations. However, as VCs’ current wealth dominates prospective wealth with their late stage investees, leading to greater risk-aversion propensity, VC funding has a negative effect on innovation novelty of late stage ventures. We further argue that the VC effect on innovation novelty of their venture investees depends on the power sources of venture CEOs, who are responsible for the managerial decisions at their respective ventures. Based on a sample of 456 biotech ventures, we find that structurally powerful CEOs, who are in a position to take greater risk, intensify the positive effect of VC funding on innovation novelty of early stage ventures and attenuate the negative effect of VC funding for late stage ventures. However, CEOs with expertise power, typically seeking more balanced innovation orientation, attenuate both the positive effect of VC funding on innovation novelty of early stage ventures and the negative effect of VC funding for late stage ventures.

Executive Stock Options as Mixed Gambles: Revisiting the Behavioral Agency Model

Conceiving of stock options as providing CEOs with cues for the possibility of both greater prospective wealth and losses to current wealth, we revisit predictions of the behavioral effects of equity-based pay using the behavioral agency model (BAM). We refine the BAM's original formulation and provide an explanation for previous conflicting empirical results by theorizing that the anticipation of prospective wealth attenuates the negative effect of accumulated current equity wealth upon CEO strategic risk taking. In doing so, we offer an advancement of the dialectic between: (1) classical agency scholars, arguing that equity-based pay leads to more risk taking, and (2) behavioral scholars, arguing that equity wealth creates risk bearing, leading to less risk taking. We also suggest that the influences of prospective wealth and current wealth on strategic risk taking depend on the extent to which agents can manage the risk inherent in their compensation package and agent vulnerability to losses. Formal hypotheses to test these expectations are made by focusing on equity-based compensation. Our findings offer strong support for these theoretical expectations.

The Virtues of Using Profitabilitymetric for Projectsselection

One of most important decisions that any organization would have to make is concerned the potential projects and assets selection. These decision-makings also being based primarily on the degree to which are joined the financial goals of the organization. Numerous common studies on project success and failure reported that the evaluation model correctly predicted almost 80 percent of the project failures and almost 75 percent of the project success. Thus selecting a project using the right technique is ultimate importance for the survival of firms and the achievement of projects. Financial numbers-based existing numeric models have some arguments cited by empirical literatures, but their advantages are many. Therefore, this literature aims to propose and describe the profitability functional method provided as a cumulative value-added metric that is widely appropriate for measuring the prospective wealth of firms, stocks, independent projects, earnable programs, and financial assets. This paper will discuss how to estimate the future worth of potential projects and assets in the dimension of profitability metric.

Wealth Effects in the GCC from Energy Commodity Prices

Oil-exporting countries, including the GCC economies, have experienced a windfall as a result of high oil prices since 2003. Hydro-carbon revenues in the Middle East which has the world’s largest share of oil and natural gas reserves have filtered into their domestic economies through increased government spending and large scale investment projects. However, given the exhaustible nature of energy resorces, long term planning is necessary in order to ensure that the revenues are not spent unwisely.Friedman’s Permanent Income Hypothesis (PIH) helps to connect economic theory to the practical/empirical approach of estimating the effect of higher energy prices on the stock of wealth represented by fossil fuel underground reserves. The PIH states that individuals base their consumption (and savings) decisions not on their current income which may be subject to transitory, short term fluctuations, but on their permanent income, their longer-term income prospects, and an estimate of their future wealth. The same reasoning, mutatis mutandis, can be applied to countries. In this paper we calculate the permanent income effect on the GCC countries deriving from the fluctuations of energy commodity prices and the implications for the future development of this region. Several scenarios are considered – based on assumptions over oil and gas prices and discount rates of income streams.The central result shows that the present value of the hydrocarbon wealth for the GCC countries can be estimated at USD 11.2 trillion, assuming a 3% rate of return (and discount rate) and a price of $50 per barrel (at 2009 constant prices). The analogous value for natural gas reserves assuming a discount rate of 3% and a price $9 per mn Btu stands at USD 7.1 trillion. Hence, the permanent wealth from oil and natural gas reserves under rather conservative assumptions stands at a whopping USD 18.3 trillion, giving GCC the potential to swap their fossil fuel reserves for half of the world’s current (August 2009) stock market capitalization!The energy commodity revenues should not be considered income, but as the transformation of underground wealth into financial wealth. This stream of revenues will be sufficient to finance the transformation of the GCC countries into diversified economies through investments in infrastructure and education. Additionally the revenues will continue to be invested worldwide, with non negligible repercussions on asset valuations and in particular on the continuing restructuring of the world’s financial and corporate sectors.There are a number of important lessons and consequences of the increased wealth of the GCC.• Their higher current and prospective wealth enables the GCC countries and other energy exporters to use their wealth to invest in economic diversification to reduce their vulnerability to oil and gas price fluctuations.• The increased financial wealth of the GCC calls for increased investment and resources to be devoted to wealth and asset management and control.• The fiscal situation and debt capacity of the GCC countries should be analysed taking into consideration the vast current and prospective wealth of the GCC countries.• The recent financial crisis has demonstrated the importance of the financial cushion provided by the international financial assets that the GCC built up over 2003-2008 in helping them weather the global economic and financial crisis.

Self-Financing Development

This paper outlines (i) a theoretical framework for designing institutions to facilitate self-financing economic development and (ii) institutional arrangements for establishing self-financing development. The framework introduces the concepts of: (i) procreative assets that generate wealth (ii) de-generate productive assets that consume income and (iii) assets that also consume income but are manifestations of higher living standards. Self-financing development depends upon replacing the conventional contrary process based on reducing consumption to generate savings to finance investment and/or obtaining external development finance with a confluent development process. Confluent development allows consumption and investment to increase together with increases in productivity from the new investment creating the savings to cancel the credits used to fund them. Institutional arrangements that allowed the US and Japan to internally finance development at the beginning of the last century provide a basis for considering how credit insurance could be used to introduce self-financing development. The cost of insurance provides a market driven mechanism for allocating credit to the most prospective wealth generating assets. Internally generated finance accelerates development as the cost of servicing external financiers is minimised and the resulting selective monetary regime facilitates economic management. The paper recommends that development institutions like the World Bank change their role from distributing credit to distributing the technology of self-financing development.

Social Security, Uncertainty Adjustments and the Consumption Decision

This paper analyzes the consumption decision, focusing on the degree of substitutability between fungible assets and prospective wealth and on the different risk adjustments associated with different types of prospective wealth. The results reveal substantial differences among these risk adjustments and imply that a dollar of social security wealth substitutes for about three-fifths of a dollar of fungible assets. Although implying that social security wealth reductions would have a positive and sizeable effect on private saving, the results also suggest that such reductions could entail a substantial loss in consumer welfare. Copyright 1992 by The London School of Economics and Political Science.