CEOs’ regulatory focus and risk-taking when firms perform below and above the bar

Both upper echelons theory and the behavioral theory of the firm (BTOF) have made important contributions to our understanding of the drivers of managerial risk-taking. Yet, how the individual- and organizational-level mechanisms espoused by these theories act in concert to determine risk-taking is not well understood. In this paper, we draw on regulatory focus theory as a fulcrum to bridge these two levels of analyses and integrate insights from both theoretical traditions. Consistent with the BTOF, we argue that promotion-focused CEOs engage in increased (decreased) risk-taking under conditions of performance below (above) aspirations. In contrast to the predictions of the BTOF, however, we predict that prevention-focused CEOs engage in increased (decreased) risk-taking under conditions of performance above (below) aspirations. We find support for these arguments in a large sample of CEOs from publicly listed U.S. firms and discuss the implications of our findings for both theory and practice.