CEO cultural heritage and R&D expenditures

Abstract

This paper examines how the cultural heritage of chief executive officers (CEOs) in US firms affects research and development (R&D) investment. Utilizing economically significant and unexpected R&D-increasing events, we examine how six dimensions of CEO cultural heritage—individualism, power distance, masculinity, uncertainty avoidance, long-term orientation, and indulgence—influence it. We find that CEOs with a high–power distance heritage are more likely to increase R&D. We confirm that this effect of CEO power distance is robust to other cultural effects, the model specification, and endogeneity issues. We conjecture that CEOs with a high–power distance heritage are more likely to increase R&D expenditures because they use their power to pursue personal objectives. Consistent with our hypothesis, we find that R&D increases made by CEOs with a high–power distance culture generate significantly lower benefits in the future, reflecting the inefficiency of these R&D investment decisions.