When Does a CEO’s Risk Propensity Drive Exploration in Product Development?

Abstract

We advance research on the managerial antecedents of exploration by studying personal, organizational, and environmental conditions under which a CEO’s risk propensity shapes a firm’s tendency to explore in product development. Our panel data analysis of 219 firms in the prepackaged software industry reveals that, when a CEO is risk-prone, the CEO’s ability to drive exploration increases with the CEO’s power in the firm, which manifests in tenure, duality, and insider origin. Counter to expectations, however, the firm’s accumulated exploration experience does not reinforce, but rather attenuates the effect of the CEO’s risk propensity on exploration. We attribute this to firms’ quest for balance between exploration and exploitation and the need to counter the CEO’s risk propensity when exploration becomes excessive. Finally, we find that competitive pressure in the firm’s product market reinforces the ability of a CEO who is more risk-prone to garner support for further exploration. Our study advances a dynamic perspective that relates the heterogeneity in firms’ exploration tendencies to the behavioral inclinations of their CEOs.