The Effect of CEO Compensation on their Responses to Institutional Pressures: Evidence from the Choice between Cross-Border Alliances and Acquisitions

Although neo-institutional theory has been increasingly sought to explain a firm’s strategic choices, there is a paucity of research explaining across-firm heterogeneity in the adoption of firm strategies. Drawing on the behavioural agency model (BAM), we explore the micro foundations of firm responses to institutional pressure by examining CEO risk preferences as an important source of practice variation. In particular, we contend that neo-institutional theorists have to consider the risk to the managerial agent created by the adoption of isomorphic strategies when explaining institutional processes. Our results support this idea by demonstrating that as risk bearing increases, CEOs are more likely to adopt strategies that are relatively less risky thereby influencing their responses to pressures emanating from the organisational field. These results also suggest that agency theorists would benefit by considering the institutional context when examining the effect of individual agency on strategic risk taking.