Academic journal article Journal of Managerial Issues

Do Prestigious CEOs Take More Risks?

Academic journal article Journal of Managerial Issues

Do Prestigious CEOs Take More Risks?

Article excerpt

CEO prestige is "the property of having status ... due to membership in elite social circles" (D'Aveni, 1990:121). Prestige is valuable as a signal of quality in the absence of performance-based measures of quality (Podolny, 1993), and as a significant source of informal power (Brockmann et al., 2004) that provides competitive advantages from a combination of skills, experiences and social connections (D'Aveni, 1990). It is important as a form of "status capital" (D'Aveni, 1990), providing advantages for the individual, such as higher compensation (Wade et al., 2006), and making it easier to foster resources and lower costs (Malmendier and Tate, 2005; Chen et al., 2008; Bothner et al., 2009).

While studies have examined the relationship between executive prestige and performance (Daily and Johnson, 1997; Hitt et al., 2001; Chen et al., 2008), only recently have studies begun to address the black box between the two. For instance, recent research has examined how organizational legitimacy mediates this relationship (Certo and Hodge, 2007), but less is known about how executive prestige affects the strategic risk-taking that can lead to performance variations. This may be important for boards considering whether or not prestigious CEOs can drive strategic change through risky action. Conflicting guidance is provided about the link between executive prestige and the risks they take in their strategic actions. Some argue that those with high prestige are hesitant about jeopardizing what they consider as a valuable and fragile asset (Fredrickson et al., 1988; Huberman et al., 2004). But other studies suggest that high prestige encourages risky action because executives can pursue new opportunities at lower cost than less prestigious counterparts (D'Aveni, 1990; Podolny, 1993; Chen et al., 2008).

The source of the confusion is suggested by this paper to be the conflation of two distinct perspectives of CEO prestige: power and status. To more clearly delineate the perspectives and their effect on strategic risk-taking, this paper examines how executives wield their personal prestige in strategic action. On one hand, prestige can be considered a form of executive power, where executives gain benefits through their superior ability to control resources (Zajac and Westphal, 1996; Daily and Johnson, 1997; Cannella and Shen, 2001). Executives, therefore, tend to try to profit from their superior ability by making risky moves that those with lower power cannot emulate. On the other hand, prestige is also seen as a manifestation of personal status within a hierarchy (D'Aveni, 1990; Lant, 1992; Certo and Hodge, 2007; Pollock et al., 2010). In this case, benefits are given to executives through the acquiescence of lower-status members. CEOs are thus hesitant about using their prestige through risky action because they fear losing prestige if lower-status members judge their behavior negatively (Webster Jr. and Rashotte, 2010). In other words, prestige can either be "taken" through domination of others in the power perspective, or "given" through deference by others in the status perspective (Magee and Galinsky, 2008). Two testable hypotheses that link executive prestige to strategic action are developed to disentangle these sources.

HYPOTHESIS DEVELOPMENT

Strategic Risk-Taking

Firms operate in a socially-constructed environment in which norms and rules collectively defined by all actors effectively define legitimate forms of behavior and outcomes according to neo-institutional theory (Zucker, 1987). In uncertain environments, industry norms are followed by mimicking the most prominent and secure entities in their fields (DiMaggio and Powell, 1983; Tolbert and Zucker, 1983; Meyer and Zucker, 1989; Haveman, 1993; Suchman, 1995; Ruef and Scott, 1998). This effect is evident in the form of an industry-specific central tendency or strategic recipe (Hall, 1993; Weber and Zuchel, 2005). By following normative recipes for their industry, firm legitimacy is gained, leading to continued resource access, and thus enhanced survivability (Deephouse, 1996). …

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