Abstract
Based on prospect theory, this study develops a conceptual model of CEOs’ career horizon problem and its implications on firm risk taking, specifically in the engagement in innovation initiatives. We propose that, depending on their expected tenure in the managerial labour market, CEOs show various levels of loss aversion and thus employ diverse strategies regarding long-term and risky R&D projects. We argue that compared to CEOs with longer career horizons, CEOs with shorter career horizons are less inclined to make R&D investments owing to their considerations in preserving personal wealth and enhancing labour market evaluation. In addition, CEOs’ incentives from within-firm pay disparity and equity holdings accentuate the horizon problem, whereas institutional ownership mitigates CEOs’ short-termism in R&D investments. Chinese listed manufacturing firms as an empirical setting produced consistent evidence for our predictions.