CEO Regulatory Foci, Environmental Dynamism, and …media.terry.uga.edu/socrates/publications/2018/04/Wallace_et_al... · by J. Craig Wallace, Laura M. Little, Aaron D. Hill, and

CEO Regulatory Foci, EnvironmentalDynamism, and Small Firm Performancejsbm_309 580..604

by J. Craig Wallace, Laura M. Little, Aaron D. Hill, andJason W. Ridge

This research proposes and tests that regulatory foci of small business chief execu-tive officers (promotion focus and prevention focus) relate to firm performancedifferentially when levels of environmental uncertainty vary. Results suggest that apromotion focus is positively related to firm performance, whereas a prevention focusis negatively related to firm performance. Further, these relationships are moderatedby the degree of environmental dynamism such that in more dynamic environments,the relationship between promotion focus and firm performance is strengthened,whereas the relationship between prevention focus and firm performance is nega-tively affected. The reverse was found for less dynamic environments. Theoretical andpractical implications as well as future research avenues are offered.

IntroductionMuch of the popular and academic

management literature, particularlyupper echelons theory (UET) (Hambrickand Mason 1984), suggests that topexecutives influence the performance oftheir firms by infusing various aspects of

themselves (their values, personality,motivations, and experiences) into mul-tiple aspects of the firm and its function-ing. The impact of these executivecharacteristics is particularly salient insmall firms and dynamic environments inwhich the executive may have more dis-cretion over decision-making (Hambrick

J. Craig Wallace is associate professor and Brattain professor of management in the SpearsSchool of Business, Oklahoma State University.

Laura M. Little is assistant professor of management in the Terry College of Business,University of Georgia.

Aaron D. Hill is a doctoral candidate in strategic management within the Spears School ofBusiness, Oklahoma State University.

Jason W. Ridge is a doctoral candidate in strategic management within the Spears School ofBusiness, Oklahoma State University.

Address correspondence to: J. Craig Wallace, Spears School of Business, Department ofManagement, Oklahoma State University, 320 Business Building, Stillwater, OK 74078. Tel:(918) 594-8060; E-mail: [email protected].

Journal of Small Business Management 2010 48(4), pp. 580–604

JOURNAL OF SMALL BUSINESS MANAGEMENT580

and Finkelstein 1987). Though the effectof executive characteristics, particularlydemographic characteristics, on firm per-formance has been well documented inUET literature (Carpenter, Geletkanycz,and Sanders 2004; Hambrick 2005), wedo not have a complete understanding ofhow different chief executive officer(CEO) values, personalities, motivations,and experiences influence small firm per-formance (Hambrick 2007; Lawrence1997). Though UET has traditionallybeen concerned with the entire top man-agement team (Hambrick and Mason1984), several pertinent extensions toUET have recognized the importance ofconsidering the impact of CEO character-istics alone, or, as Hambrick (2007)notes, “the upper echelons perspectivedoes not require a focus on TMTs, and anumber of significant contributions haveexamined CEOs or other individualleaders” (p. 334). Hambrick (2007) iscorrect that many studies uncoveringimportant relationships between CEOdemographic characteristics and impor-tant firm outcomes have been publishedof late, including the impact on firm per-formance, organizational change, strat-egy, and structure (Cannella, Finkelstein,and Hambrick 2008; Carpenter, Gelet-kanycz, and Sanders 2004; Finkelsteinand Hambrick 1996; Hage and Dewar1973; Jensen and Zajac 2004; Marks andMirvis 1998a, 1998b; Miller and Droge1986). Despite the rich line of inquirythat illustrates the importance of CEOdemographic characteristics, compara-tively, little work has examined theimpact of non-overt characteristics suchas executive motivations that mightrelate to firm performance. We proposethat CEOs’ motivations influence organi-zational goals and, ultimately, whetheror not the organization meets these goalswithin its operating environment. Webelieve this is particularly true in smallfirms where the CEO exercises morecontrol over the firm (Lawrence andLorsch 1967), and as such, their influ-

ence is particularly important in regardto the performance of their firm.

Regulatory focus theory (Higgins2000, 1997) is a particularly apt frame-work to utilize in this context because itencompasses two distinct motivationaldispositions that are known to differen-tially influence individual behavior: pro-motion focus (i.e., eager focus for gainsand accomplishments) and preventionfocus (i.e., vigilant focus for duty andresponsibility) (Higgins 2000; Wallaceand Chen 2006). Regulatory focus theorycan help explain how executives influ-ence firm performance, particularly forsmall firms in dynamic markets becauseuncertain environments and limitedresponse times affect managerial deci-sions (Barr, Stimpert, and Huff 1992) andbecause top managers have, as well asexercise, more control in smaller firms(Lawrence and Lorsch 1967). However, itis not clear the reasons that one managermay be more successful than another insuch uncertain situations.

This research addresses these issuesby testing an interactional model of regu-latory focus, environmental dynamism,and firm performance in small firms. Inparticular, we add to our knowledge ofboth upper echelons and regulatoryfocus theories by investigating the regu-latory foci of CEOs, an important addi-tion to the UET “black box problem”(Lawrence 1997). Further, extendingHiggins’s (2000, 1997) regulatory focustheory, we propose that the chronicregulatory foci of a CEO is a key indi-vidual difference that can influence firmperformance and that this influence willbe dependent upon the environment inwhich he/she operates. Figure 1 pro-vides an overview of our theoreticalmodel that we delineate below.

Theoretical Frameworkand Research HypothesisExecutive Regulatory Focus

Hambrick and Mason (1984) articu-lated a model in which top executives

WALLACE ET AL. 581

play a pivotal role in shaping major orga-nizational outcomes. They suggest thatexecutives act on the basis of theirunderstanding of the circumstances theyface and that these personalized interpre-tations are a function of the executives’personalities and prior experiences(Hambrick 2007). In this manner, theorganization is a reflection of the uppermanagement that directs the actions inwhich the organization engages. As thehighest level manager in the firm, theCEO is most likely to possess discretionwith the least restrictive oversight(Hambrick and Fukutomi 1991). TheCEO occupies the key decision-makingposition, which provides the oppor-tunity for their personal characteristicsto have significant ramifications onorganizational strategies, structure, andsubsequent performance (Cannella,Finkelstein, and Hambrick 2008).

Supporting this view, CEO personalityhas been investigated for its relationshipto strategic decision-making. Miller andcolleagues (Miller and Toulouse 1986;

Miller, Kets de Vries, and Toulouse,1982) found that though firms led byconfident and aggressive CEOs pursuedrisky and innovative strategies, those ledby CEOs given to feelings of “helpless-ness” tended to adopt more conservativestrategies. More recently, CEO narcissismhas been shown to engender extremeand fluctuating organizational perfor-mance (Chatterjee and Hambrick 2007).Furthermore, CEOs with an internallocus of control were associated with thesuccess of small firms and new ventures(Brockhaus 1980; Van de Ven, Hudson,and Schroeder 1984). In this regard, itcan be expected that the manner inwhich a CEO strives for desired goalscould affect decision-making and there-fore subsequent performance.

As highlighted above, we posit thatregulatory focus theory (Higgins 2000,1997) is a useful framework to utilizewith CEOs and firm performancebecause it encompasses two distinctmotivational dispositions that are knownto differentially influence behavior: pro-

Figure 1Expected Theoretical Relationships

Promotion Focus

Prevention Focus +

+

-

+

Dynamism Firm

Performance


motion and prevention focus (Higgins2000; Wallace and Chen 2006). Higgins(1997) proposed that regulatory focus isa tendency that influences how personsapproach and strive for desired goals. Apromotion focus eagerly matches behav-ior to a goal by focusing on attainingpositive outcomes without regard forpossible negative consequences. That is,“individuals in a promotion focus, whoare strategically inclined to approachmatches to desired end-states, should beeager to attain advancement and gains”(Higgins 1997, p. 1285). Thus, a promo-tion focus drives individuals to be carefulto not make any errors of omission (i.e.,lack of accomplishments), and as such,they are typically more efficient indecision-making and execution of deci-sions than those preferring a preventionfocus (Higgins 2000, 1997). Those indi-viduals employing a promotion focus areconcerned with the attainment of aspira-tions and accomplishments by increasingthe salience of positive outcomes andgains by looking for more efficientmechanisms to reach desired goals. Theywant to succeed, and to do so, will seekout multiple pathways and mechanismsthat should allow for success, often timesbeing very creative (Brockner, Higgins,and Low 2003). Higgins (1997) claimedthat a promotion focus is engenderedfrom the ideal self (striving to be allhe/she can be); creative and investigativeinterests; self-direction to meet one’shopes, desires, and wishes; and situa-tions framed in terms of opportunity,gain, and achievement.

A prevention focus approach is vigi-lant to avoid behaviors that mismatch agoal (Higgins 1997). Specifically, “indi-viduals in a prevention focus, who arestrategically inclined to avoid mis-matches to desired end-states, should bevigilant to ensure safety and non-losses”(p. 1285). That is, a prevention focusdrives a person to be vigilant to avoiderrors of commission (i.e., making amistake) by increasing the salience of

possible obstacles to goal attainment. Inessence, those employing a preventionfocus are concerned with the attainmentof responsibility and safety by increasingthe salience of negative outcomes andconsequences in an effort to avoid poten-tial pitfalls that would prohibit successfulgoal attainment. An executive with a pre-vention focus would be more inclined toengage in careful, systematic decision-making, which is characteristic of deci-sion comprehensiveness (Fredricksonand Mitchell 1984). Higgins (1997)claimed that a prevention focus is engen-dered from the ought self (striving to bea responsible and dutiful person), con-ventional and conservative interests, self-direction to meet safety and securityneeds, and situations framed in terms oflosses and security.

In the work motivation domain, thereare two primary domains: approachand avoidance. Avoidance motivationincreases the discrepancy between thecurrent state and the goal state.Approach motivation reduces the dis-crepancy between the current state andthe goal state (Kanfer 1990). Both pro-motion and prevention foci have beensuggested and empirically supported toreside in the approach domain of moti-vation, not the avoidance domain ofmotivation (Higgins et al. 1994). This isbecause both promotion and preventionfoci allow one to reduce discrepanciesbut use different means to lessen incon-gruence between the current state andthe desired goal. Promotion seeks out“hits” and approaches such hits to maxi-mize gains, whereas prevention seeksout “misses” and prevents such misses inan effort to obtain a goal while minimiz-ing losses.

Furthermore, recent research (Wallaceand Chen 2006) suggests that regulatoryfocus in the workplace is moderatelystable over time, similar to other con-structs in the workplace (e.g., work goalorientation, VandeWalle 1997). Giventhat regulatory focus stems from both

WALLACE ET AL. 583

stable personal values and needs, andsituational stimuli (e.g., leadership; seeFörster, Higgins, and Bianco 2003;Higgins 2000, 1997), levels of promotionfocus and prevention focus may changeas situational stimuli change, such aswhen employees are exposed to changesin leadership, work climate, or taskdemands. Absent important changes inthe work environment, regulatory focusat work is unlikely to change (Brocknerand Higgins 1997). Even with the poten-tial for influencing one’s focus, Higgins(2000, 1997) suggests that individualshave a chronic preference for one focusor the other that is strongly rooted inone’s developmental history (i.e., stableneeds and values). Hence, individualstypically use one focus or the otheracross the majority of work activities andseek a fit between their regulatory focusand the environment within which theyoperate. Given our dynamic businessenvironment, it is likely the case thathigher dynamism will impact the rela-tionships between one’s regulatory fociand performance as individuals attemptto create regulatory fit, which we discussin more detail below.

CEO Regulatory Focus andFirm Performance

When making decisions and settinggoals for the organization, CEOs’ choicescan vary widely, and therefore, theyinsert multiple aspects of themselves intodecisions (Finkelstein and Hambrick1996; Hambrick and Mason 1984; Houseand Aditya 1997). Through the decisionsmade by top leaders (e.g., founder,owner, CEO), the organization’s strategy,goals, and culture (direction-settingframework) are defined and in turnshape the organization in ways thatresemble the executives’ own direction-setting framework (Miller and Droge1986; Schneider 1987). This is particu-larly true for small young firms (Boone,De Brabander, and Hellemans 2000;Boone, De Brabander, and Witteloostuijn

1996; George, Wiklund, and Zahra 2005;Giberson, Resick, and Dickson 2005).

Accordingly, in order to understandorganizational outcomes, one must con-sider the personalities, dispositions, andbiases of top executives (Cannella,Finkelstein, and Hambrick 2008; Finkel-stein and Hambrick 1996; Hambrick2007; Hambrick and Mason 1984;Schneider 1987). We believe that animportant disposition to study on theseterms is an executive’s regulatory focusprimarily because of its motivationalnature and impact on individual perfor-mance and behavior across many socialcontexts (Higgins 2000, 1997; Wallaceand Chen 2006). Cognitive, emotional,and financial resources are allocatedtoward aspects of achievements andgains for the organization with thoseCEOs who are promotion focusedbecause such a tendency leads to abehavioral manifestation of eagerlysearching for new methods to increaseefficiency (and ultimately effectiveness).With regard to a prevention focus,resources are allocated toward duty andsecurity because such a focus is con-cerned with identifying potentialobstacles and therefore might miss someopportunities because of the highly vigi-lant nature of a prevention focus (focus-ing on what I know has led to success inthe past, Wallace and Chen 2006).

Generally, we expect the same patternof performance relationships to be foundbetween promotion and prevention foci,and firm performance because of theoverall approach and motivational aspectof both regulatory foci. It is likely that apromotion focus will lead to higher firmperformance as the manifestation of apromotion focus leads to more accom-plishments and gains for the entire firmbecause chief executives are looking fornewer methods to help the firm succeed.However, a promotion focus is not aguarantee for success; it is also possiblethat more mistakes might be made in theprocess of striving for additional gains. A


promotion focus is not concerned withmistakes, only gains, and is thereforeresilient to move on toward more gainsafter making a mistake (Higgins 2000,1997). Hence, we believe that a promo-tion focus positively relates to firm per-formance. Similarly, a prevention focuswill lead to increased firm performance.This is because such individuals will con-tinue to engage and invest resources intoaspects of the business that have beensuccessful and likely continue to lead tosuccess, but do so in a more vigilant anddutiful fashion to ascertain financialsecurity and avoid potential mistakes.Thus, our first set of hypotheses:

H1: CEO promotion focus positivelyrelates to firm performance.

H2: CEO prevention focus positivelyrelates to firm performance.

Moderating Influence ofEnvironmental Dynamism

Strategic management research haslong dealt with industry dynamism (Barr,Stimpert, and Huff 1992; Dess and Beard1984; Henderson, Miller, and Hambrick2006; Hrebiniak and Snow 1980) and isone of the key environmental character-istics, among others (e.g., munificenceand complexity), that Dess and Beard(1984) identified. Many previous investi-gations into UET have emphasized therole of dynamism and its effect on orga-nizational actions (Henderson, Miller,and Hambrick 2006). Stable environ-ments are characterized by minimalchange in customer preferences, tech-nologies, and competitive dynamics,whereas highly dynamic industries arecharacterized by a high rate of changeand instability, increasing decisionuncertainty. As a result of high uncer-tainty, the organization is required torespond more rapidly to unforeseenchange in order to survive, and as such,the decision-making process is muchmore complex (Barr, Stimpert, and Huff

1992; Dess and Beard 1984; Lawrenceand Lorsch 1967). As Eisenhardt (1989)showed, managers in high-velocity envi-ronments utilize more, rather than less,information and develop more alterna-tives than their counterparts that are con-fronted with less turbulent atmospheres.Operating in a more highly dynamicenvironment has been shown to affectmanagers’ perceptions regarding the riskof organizational failure (Hambrick andFinkelstein 1987). Studies have shownthe differential effects of dynamism onthe relationship between corporate lead-ership and organizational performance(Shamir and Howell 1999; Waldmanet al. 2001). Furthermore, Waldman et al.(2001) found that charismatic leadershippositively related to firm financial perfor-mance only in highly uncertain environ-ments, whereas it negatively related toperformance in less uncertain environ-ments. Thus, leader behaviors, as exem-plified by charismatic leadership,differentially relate to firm performance.Though it is apparent that limitations onresponse time and facing uncertain envi-ronments affect managerial decisions,leader motivations (e.g., regulatory foci)that might be helpful to top managers,their behavior, and their firm’s perfor-mance remain unstudied but may bequite influential in relation to perfor-mance (Kark and van Dijk 2007).

Small firms that do not align withshifts and changes in the market arequickly replaced by new business entriesthat are willing to adapt (Burke 2002;Foster and Kaplan 2001). Much of theemphasis on adaptation for small firmsstems from the executive level, and asnoted already, this is particularly the casein highly dynamic environments.Because of the necessity to react quickly,promotion focus is likely to lead tohigher performance in dynamic environ-ments than preventive focus, which ischaracterized by a slower, more deliber-ate approach to decision-making toavoid possible errors. As such, perhaps

WALLACE ET AL. 585

the environment in which a firm operatescan also change the magnitude betweenregulatory focus and firm performance.

Regulatory FitHiggins (2002, 2000) relates regula-

tory focus to a sense of “feeling right”about one’s approach to goal attainmentfor a given context (Higgins 2006;Higgins and Freitas 2007). Certain busi-ness environments can also just “feelright” for certain individuals (e.g.,person–environment fit; Cable andParsons 2001), and the fit should lead tohigher effectiveness. For example,Greiner, Bhambri, and Cummings (2003)suggest that a CEO’s orientation towardaction should be matched with certainopportunities in order to gain a competi-tive advantage. Therefore, we believethat the CEO’s orientation for promotionor prevention focus can be manifest dif-ferently in their direction-setting frame-work across different environments.Regulatory fit, in this case, is posited toresult from congruence between a CEO’sregulatory focus and the stability, or lackthereof, in the operating environment.Integrating regulatory fit with environ-mental dynamism would suggest that aprevention focus, characterized by vigi-lant, secure, and stability focus utilizingcomprehensive decision-making, is notthe best strategy in an environment withhigh uncertainty, whereas a promotionfocus, with its eager and achievementfocus, would positively impact perfor-mance in a dynamic environmentbecause a promotion focus is associatedwith quicker adaption and calculatedrisks (Förster, Higgins, and Bianco2003).

A dynamic operating environmentprovides a larger degree of manageriallatitude of action, which works well witha promotion focus in driving a CEO tosearch and pursue goals with the interestin attaining more gains. In these situa-tions, promotion focus tends to generatemany more options than a prevention

focus. This is because of allocatingresources (cognitive, emotional, andfinancial) toward multiple aspects of thebusiness to move it forward, stemmingfrom a willingness to change and therebyengaging in creative activities that shouldyield higher returns. As mentionedalready, Liberman et al. (1999) foundthat a promotion focus results in morecreativity and innovation in identifyingnew methods that facilitate effectiveness.Creativity and willingness to quicklyadapt are two key components for firmeffectiveness in dynamic conditions(Burke 2002). A CEO using a preventionfocus lacks the creative zest for high firmperformance and also is resistant tochange due to the secure and vigilantfocus, particularly in a dynamic environ-ment as a prevention focus centers onstability and comprehensiveness. Thisfocus on stability and comprehensive-ness could lead to stagnation in decision-making, thereby allowing possiblebeneficial strategic actions to gountapped. These neglected opportunitiesand focus on comprehensiveness fail toadvance the firm in turbulent environ-ments and can lead to languishing per-formance, particularly in a dynamicindustry characterized by the necessity ofquick decision-making (Fredrickson andMitchell 1984). Thus, we hypothesize:

H3: The relationship between promo-tion focus and firm performance ismore positive in high environmentaldynamism than in low environmen-tal dynamism.

H4: The relationship between preven-tion focus and firm performance isless positive in high environmentaldynamism than in low environmen-tal dynamism.

Empirical EvidenceParticipants and Procedures

By using the U.S. Postal Service, wesampled 1,059 CEOs of small firms. All


participating firms were smaller than 300employees, and the mean size of the firmwas 134 with an average firm age of 36years. These are well-established firmswithin their environment. CEOs wereidentified through a university alumni listfrom a large Midwestern business school.All participants had at least one degreefrom this business school. Each execu-tive was sent a postcard notification ofthe study. This postcard served two pur-poses: (1) to inform that the study wasbeing conducted, and (2) that we wishedfor them to participate. Approximatelyone week later, the survey itself wasmailed to all the CEOs followingDillman’s (1983) total design method.The survey contained a measure of regu-latory focus, environmental dynamism,firm performance, and questions relatingto both individual and organizationaldemographics. We received completesurvey data from 142 CEOs, and therewere 178 bad addresses, giving us aresponse rate of 16.1 percent, which issimilar to other response rates obtainedin other CEO studies (DeTienne andKoberg 2002; Hmieleski and Baron2008). Unlike many traditional CEOstudies that rely on concurrent self-reported data from the CEO, we alsowanted to better gauge our hypotheseswith other reports of contextual variablesand outcomes. Hence, we next requestedthat the CEOs ask one of their other topmanagers who was a part of the topmanagement team and would be familiarwith the firm’s strategic issues to com-plete a similar survey. The “top manager”survey only contained measures for orga-nizational dynamism and firm perfor-mance. We received complete topmanager data from 70 executives, givingus a response rate of 49.3 percent. Thishelped us overcome limitations associ-ated with common source data.

MeasurementsAll survey items used in the present

study are presented in the Appendix.

Regulatory Focus. Promotion and pre-vention focus items were drawn fromLockwood, Jordan, and Kunda (2002).The promotion focus scale contains sixitems, and the prevention focus containssix items. The scale uses a five-pointLikert format (1 = never; 5 = constantly),and both factors were found to be inter-nally consistent (promotion a = 0.88 andprevention a = 0.84).

Environmental Dynamism. A scaledeveloped by Miller and Friesen (1982)and adapted by Gilley and Rasheed(2000) was used to assess environmentaldynamism. The scale contains sevenitems (e.g., little need to change market-ing practices; consumer demand easyto predict) and is scored using aseven-point Likert format (1 = stronglydisagree; 7 = strongly agree). The dyna-mism ratings were found to be internallyconsistent (CEO a = 0.72; top managera = 0.81)

Firm Performance. Dess and Robinson(1984) suggested that researchers mightbe well served to utilize subjective finan-cial performance when researching smallfirms because it is very unlikely thatsmall private firms will provide objectivefinancial data. We found this to be true inour study and thus elected to collect sub-jective firm performance data from boththe CEO and the other top manager. Thisapproach has additional advantages aswell. As Venkatraman and Ramanujam(1987) note, subjective performancemeasures such as the one utilized in thisstudy have been found to be highly cor-related with objective measures of firmperformance. Further, subjective mea-sures allow for a broader conceptualiza-tion of firm performance that isadditionally beneficial for severalreasons. First, subjective measures betterreflect the multidimensionality of thefirm performance construct (Cameron1978; Chakravarthy 1986; Richard et al.2009). Second, because executives are

WALLACE ET AL. 587

asked to compare their firm relative tosimilar firms in the same industry, thishelps to minimize the effects of industry(Dess, Ireland, and Hitt 1990) and stra-tegic group membership (Hatten, Schen-del, and Cooper 1978). Third, it allowsfor comparisons on a wide array of orga-nizational performance measures. Forinstance, subjective measures may moreaccurately reflect a balanced scorecardapproach because they “add customer,internal process, and innovation mea-sures to the measurement of financialperformance” (Richard et al. 2009, p.735). As such, subjective assessments ofperformance are able to more fully rep-resent a balanced scorecard of perfor-mance that objective financial measuresmay not be able to assess (Kaplan andNorton 1996).

As Richard et al. (2009) note, perfor-mance measures should strive to capturethree dimensions of organizational per-formance, including: (1) financial perfor-mance; (2) stakeholder performance; and(3) sources of heterogeneity relative toresource allocation. We utilized a 14-itemmeasure of firm performance adapted byGilley and Rasheed (2000) from theinitial measure developed by Dess andRobinson (1984), and Pearce, Robbins,and Robinson (1987). The instrumentchosen for this research captures each ofthe three dimensions recommended byRichard et al. (2009). Specifically, thismeasure captures financial performance(four items—return on assets, return onsales, sales growth, and overall financialperformance), stakeholder performance(five items—stability/growth of employ-ment, employee morale/job satisfaction,customer relations, supplier relations,overall nonfinancial performance), andheterogeneity with regard to resourceallocation strategies (five items—fundsallocated to R&D, funds allocated toadvertising, process innovations, productinnovations, and compensation ofemployees). Several other scholars haveutilized this instrument as well (e.g.,

Gilley, Greer, and Rasheed 2004; Priem,Rasheed, and Kotulic 1995). The firmperformance ratings were found to beinternally consistent (CEO a = 0.88; topmanager a = 0.76) and utilized a five-point Likert scale (1 = at the bottom ofsimilar firms in the industry; 5 = at thetop of similar firms in the industry).

CEO Gender and CEO Tenure. Strategyresearch has long addressed the demo-graphic characteristics of the CEO andtheir impact on firm performance (Finkel-stein and Hambrick 1990; Miller andShamsie 2001; Westphal and Zajac 1995).As such, to accurately assess our model,we controlled for these variables. CEOgender was a dichotomous variable, withthe value 1 indicating male and 0 indicat-ing female. Tenure was the number ofyears that the individual had occupied theposition as CEO of the organization.

Firm Age and Firm Size. The age andsize of a firm may provide resourcesfrom which the firm can draw to morefavorably compete (Stinchcombe 1965).As such, controlling for the liabilities ofnewness and smallness is necessary tomore accurately assess the intendedhypotheses (Freeman, Carroll, andHannan 1983; Hannan and Freeman1984). Firm age was measured as thenumber of years since firm founding,and firm size was measured by thenumber of employees.

ResultsDescriptive statistics and bivariate cor-

relations can be found in Table 1. Pro-motion focus was positively related toboth CEO- and top manager-reportedfirm performance, whereas preventionfocus was negatively related to topmanager reports of performance andshared a nonsignificant relationship withCEO-rated performance. Prior to testingindividual hypotheses, data for all pre-dictor variables were centered beforecreating the interaction terms to help


Tab

le1

Des

crip

tive

and

Biv

aria

teC

orr

elat

ions

for

Var

iable

sin

Stu

dy

Var

iable

aM

S.D

.a1

23

45

67

89

10

1.Pro

motion

Focu

s0.

883.

620.

56—

2.Pre

vention

Focu

s0.

842.

780.

600.

23*

—3.

CEO

-Rep

ort

edb

Envi

ronm

enta

lD

ynam

ism

0.73

4.01

0.91

-0.0

5-0

.06

—

4.CEO

-Rep

ort

edFi

rmPer

form

ance

0.84

3.56

0.54

0.22

*-0

.03

0.14

—

5.Top

Man

ager

-Rep

ort

edEnvi

ronm

enta

lD

ynam

ism

0.79

4.10

1.01

-0.1

5-0

.34*

0.62

*0.

05—

6.Top

Man

ager

-Rep

ort

edFi

rmPer

form

ance

0.81

3.38

0.68

0.19

*-0

.24*

0.28

*0.

69*

0.36

*—

7.N

um

ber

of

Firm

Em

plo

yees

134

105

0.02

-0.1

2-0

.02

-0.0

50.

01-0

.09

—

8.A

geof

Firm

3611

.90

-0.0

5-0

.05

-0.0

5-0

.19*

0.16

-0.0

3-0

.05

—9.

CEO

gender

b1.

820.

380.

18*

0.10

-0.0

70.

03-0

.13

0.09

0.06

-0.0

6—

10.

CEO

Ten

ure

b15

.05

13.2

30.

030.

14-0

.09

0.01

-0.0

60.

05-0

.07

0.06

0.07

—

a S.D

.,st

andar

ddev

iation.

bCEO

,ch

ief

exec

utive

offi

cer.

*Lev

els

of

sign

ifica

nce

:p

<.0

5.

WALLACE ET AL. 589

control for the possibility of spuriouseffects, following Aiken and West (1991).Spurious effects may appear as a resultof multicollinearity between the predic-tors and the interaction term, or, asAiken and West (1991) state, “the multi-collinearity in the context of regressionwith (interaction terms) is due to scaling,and can be greatly lessened by centeringvariables” (p. 35). Hierarchical moder-ated regression was employed to test thestated hypotheses on both the CEO- andtop manager-reported data. As an initialstep, four variables common to researchon the dependent variable of firm perfor-mance (Westphal and Zajac 1995) wereincluded as controls: the number ofemployees to control for firm size, firmage, CEO gender, and CEO tenure. In thenext step, promotion, prevention, anddynamism were entered in each regres-sion to assess main effects followed bythe third and final step, which includedthe interaction terms of promotion focusand dynamism, and prevention focus anddynamism in each regression.

Results generally supported theexpectations outlined in the Introduc-tion, and results for each step can befound in Table 2 for the CEO and inTable 3 for the top manager, respec-tively. It was found that promotion focuspositively related to firm performance forCEO ratings of performance as well asfor top manager ratings of performance.Thus, H1 was supported (CEO: b = 0.23,p < .05; top manager: b = 0.29, p < .05).H2 was not supported (CEO: b = -0.15,p > .05; top manager: b = -0.44, p < .05).In fact, prevention focus negativelyrelated to firm performance in topmanager reports of performance, andresults from the CEO-reported firm per-formance were nonsignificant.

In accordance with H3, it was foundthat environmental dynamism positivelymoderated the relationship between pro-motion focus and firm performanceacross both the CEO and top managerreports of firm performance and environ-

mental dynamism. The significant inter-action for promotion ¥ dynamism onfirm performance displayed in Figure 2fully supports H3 (CEO: b = 0.21, p < .05;top manager: b = 0.38, p < .05). Likewise,in full support of H4 (CEO: b = -0.28,p < .05; top manager: b = -0.44, p < .05),it was found that the relationshipbetween prevention and firm perfor-mance is moderated negatively by envi-ronmental dynamism across both theCEO and top manager reports of firmperformance and environmental dyna-mism, as indicated by the significantinteraction for prevention ¥ dynamism inFigure 3.

Figure 2 shows, and tests of simpleslopes support (p < .05), that there is apositive relationship between promotionfocus and performance in highlydynamic environments and a nonsignifi-cant relationship when dynamism is low.Figure 3 shows, and tests of simpleslopes support (p < .05), that preventionfocus positively relates to performance inlow dynamism environment and nega-tively relates to performance in highdynamism environments. In short, whenconfronted with highly dynamic environ-ments, the relationships among regula-tory foci and firm performance aremodified such that the effects of promo-tion are more positive and the effects ofprevention are more negative in condi-tions of high dynamism. However, inenvironments of low dynamism, preven-tion focus appears to be the only signifi-cant and positive indicator of firmperformance. Thus, it does appear thatthe regulatory fit of a given CEO isimportant in determining firm perfor-mance when operating under differentenvironmental conditions.

DiscussionThough previous research in regula-

tory focus theory has found that differ-ences exist between individuals’regulatory foci and their subsequent per-formance, no research has addressed this


application in the context of the perfor-mance of the individual’s organization atthe small firm level. Likewise, upperechelon theory has long addressed theimpact that characteristics of key execu-tives have on their respective organiza-tions but has yet to examine thepsychological traits associated with thoseindividuals’ motivational goal attainmentand their impact on firm performance(Hambrick 2007; Lawrence 1997). Thisstudy addresses the paucity of researchrelating non-overt executive characteris-

tics to firm performance. First, weexplore how CEO regulatory focusrelates to firm performance by investigat-ing the extent to which the relationshipsthat an executive’s tendency toward goalattainment impact performance of theirorganization. We hypothesized thatalthough both promotion focus and pre-vention focus would positively impactperformance, the eager nature of promo-tion focus will lead to higher firm per-formance than prevention focus, whichis more inclined toward avoiding mis-

Table 2Moderated Multiple Regression of CEOa-Reported Firm

Performance on CEOa Regulatory Focus andCEOa-Reported Environmental Dynamism

b R2 DR2 F

Step 1Number of Firm Employees -0.08Firm Age -0.19Gender of CEOa 0.04Tenure of CEOa -0.01 0.04 0.04 0.84

Step 2Number of Firm Employees -0.09Firm Age -0.18Gender of CEOa 0.01Tenure of CEOa 0.04Promotion Focus 0.23*Prevention Focus -0.15Dynamism 0.11 0.11 0.07 1.39

Step 3Number of Firm Employees -0.11Firm Age -0.18Gender of CEOa 0.08Tenure of CEOa 0.02Promotion Focus 0.28*Prevention Focus -0.19Dynamism 0.11Promotion Focus ¥ Dynamism 0.21*Prevention Focus ¥ Dynamism -0.28* 0.21 0.10 2.29*

aCEO, chief executive officer.*Level of significance: p < .05.

WALLACE ET AL. 591

takes and proceeding cautiously. Resultssupported the more positive impact ofpromotion focus over prevention focus;contrary to H2, prevention focus did notrelate to CEO-rated firm performanceand negatively related to top manager-rated firm performance. This may bebecause in many small firms, there islittle stability, and firms must adapt on amore continual basis than larger firms.Second, the present inquiry sought toincorporate the degree of regulatory fitbetween a CEO’s regulatory foci and the

environment of their organization.Results indicated that the environmentdoes play a key role in the effectivenessof the CEO’s regulatory focus as it relatesto firm performance.

ImplicationsPrior research has suggested that a

firm should match their CEO’s action ori-entation with extant opportunities toachieve higher performance (Greiner,Bhambri, and Cummings 2003). Thepresent study set out to empirically

Table 3Moderated Multiple Regression of Top Manager-Reported

Firm Performance on CEOa Regulatory Focus and TopManager-Reported Environmental Dynamism

b R2 DR2 F

Step 1Number of Firm Employees -0.19Firm Age -0.10Gender of CEOa 0.12Age of CEOa -0.01 0.11 0.11 0.97

Step 2Number of Firm Employees -0.18Firm Age -0.12Gender of CEOa 0.17Age of CEOa 0.19Promotion Focus 0.29*Prevention Focus -0.44*Dynamism 0.22 0.25 0.14 2.49*

Step 3Number of Firm Employees -0.19Firm Age -0.17Gender of CEOa 0.17Age of CEOa 0.03Promotion Focus 0.22*Prevention Focus -0.40*Dynamism 0.17Promotion Focus ¥ Dynamism 0.38*Prevention Focus ¥ Dynamism -0.44* 0.47 0.12 4.98*

aCEO, chief executive officer.*Levels of significance: p < .05.


answer this question by assessing thecorrespondence between the CEO’sregulatory focus and the degree of envi-ronmental dynamism confronting theirorganization. In highly dynamic environ-ments, the demands placed on the CEOto make quick decisions when faced withuncertainty are heightened (Barr,Stimpert, and Huff 1992). As such, stra-

tegic leadership of organizations facingdynamic environments may be bettersuited for those individuals with higherpromotion focus. The tendency of indi-viduals with higher promotion focustoward goal attainment may provide abetter fit in turbulent situations thatnecessitate rapid response than will theirmore prevention-focused counterparts,

Figure 2Interaction between Promotion Focus and Dynamism on

Firm Performance

WALLACE ET AL. 593

who typically take a more cautious anddeliberate approach before acting. Theregulatory focus of the executive is animportant characteristic to consider, par-ticularly in the context of different envi-ronmental conditions. Promotion focusdrives an individual to proactivelyadvance their organizations and engagein higher degrees of innovation and new

product development that have beenshown to positively affect performancein turbulent environments (Moormanand Miner 1997). In contrast, preventionfocus drives individuals to avoid costlyerrors and shift organizational focustoward operational improvements,missing important opportunities thatpresent themselves.

Figure 3Interaction between Prevention Focus and Dynamism on

Firm Performance


The findings of the current investi-gation have confirmed these beliefs.Promotion focus interacts with environ-mental dynamism such that more promo-tion focus in a more dynamicenvironment achieves superior perfor-mance. These results support the notionthat the emphasis stemming from a pro-motion focus may be preferable to thevigilant nature of a prevention focus forthe upper most position in the organiza-tion. Additionally, a CEO with a tendencytoward a promotion focus may be moreconducive to effectively managing anorganization in a more dynamic industry.With the increasing dynamism through-out the business landscape, organiza-tions might be better served to hire andutilize CEOs with a promotion focus, yetmore research is needed to formally testthis. However, organizations that are inneed of stability may benefit from a CEOwith a prevention focus. This is becauseit appears that the fit between a topleader’s motivational foci and industrydynamism are two key levers that par-tially determine firm performance.

These findings add to our knowledgeof both upper echelons and regulatoryfocus theories in showing how the psy-chological processes of executives mayaffect the performance of their firms.Further, the executive’s regulatory focusmay need to be matched with thedemands placed on their organization inorder to help optimize the performanceof their firm. Though this study makes animportant contribution to both UET andregulatory focus theory by assessing theimpact of executive psychological traits,in addressing this initial question, poten-tial items of interest have surfaced thatwill require further discussion andresearch.

First, can organizations effectivelymatch the situations that confront them(i.e., their strategy, goals, and environ-mental conditions) with a CEO that willbe best suited to elicit the desired per-formance of the organization and does

the mismatch between the regulatoryfoci of executives and the environmentin which they face help explain therecent decrease in CEO tenure within theFortune 500 (Charan and Colvin 1999).Organizations might be able to improveperformance by selecting an executivewhose regulatory foci is the best matchwith their organizational goals. Likewise,executives might be able to assess theirregulatory processes and either self-select into appropriate environmentalcontexts or engage in appropriate devel-opmental opportunities to help adjustand account for their regulatory pro-cesses. The moderating effects of dyna-mism on the regulatory focus to firmperformance relationships suggest thatdynamism is an important situationalfeature that must be considered if a firmsees a need to select a CEO (i.e., need toensure regulatory fit). In this regard,firms must first identify the uncertaintypresent within the market they operate.If the firm operates in a more stableenvironment, then a CEO using a preven-tion focus appears to have more benefi-cial effects on performance. Today’smarkets are typically highly dynamic,and therefore, our results suggest thatfirms operating in highly dynamic indus-tries would benefit substantially morewith the selection of a CEO using a pro-motion focus.

Limitations and FutureResearch

As a possible extension of these find-ings, research might benefit from inves-tigating the relationships amongregulatory foci and executive jobdemands, or the degree to which anexecutive finds his/her job to be difficultor challenging (Hambrick, Finkelstein,and Mooney 2005). Strategic decision-making may be enhanced by a personwith a promotion focus when coupledwith high job demands, for example. Onthe contrary, an executive using a pre-vention focus may tend to struggle when

WALLACE ET AL. 595

job demands are believed to be high,which might result in an attempt toimitate the strategic actions of otherfirms in the industry. This suggestslooking at the process enacted by differ-ent motivational foci and studying theallocation of resources in a more finitemanner.

Furthermore, recent group researchalso provides paths to further our under-standing of regulatory foci at strategiclevels and firm performance. Brockner,Higgins, and Low (2003) have suggestedthat to maximize performance, top man-agement teams need to encompass bothpromotion- and prevention-focused indi-viduals. This is because individuals in apromotion focus are consumed withfinding “hits,” and individuals in a pre-vention focus are consumed with avoid-ing “misses.” Thus, many promotionideas, decisions, and strategies mightoverlook some potential pitfalls, yet ifthere are prevention-oriented individualson the team, they might catch themistake and prevent it from movingforward. In essence, individuals using aprevention focus on top managementteams might act as filters to the ideas,decisions, and strategies that are devel-oped by promotion-focused individuals.Future research is needed to tell if thisline of reasoning holds empirically.

Another avenue for future researchthat this research has highlighted is theimportance of considering both personaland environmental factors as determi-nants of firm performance (Baron 2007;Mitchell et al. 2007). In the currentpaper, we addressed environmentaldynamism; however, several other envi-ronmental characteristics may also inter-act with the regulatory disposition of theexecutive to affect the performance oftheir organizations. Future researchcould address the impact of additionalenvironmental characteristics such asenvironmental munificence and com-plexity. For example, it is possible that inmunificent environments, which are

marked by a high degree of stability andcapacity for growth, both prevention andpromotion focus would positively affectfirm performance because of theincreased existence of slack resources(Cyert and March 1963). The additionalslack in the organization could provide a“buffer” for organizational actions (Dessand Beard 1984) such that a variety ofmotivational dispositions may be effec-tive despite their different approaches togoal attainment.

Although the current investigationadds to our understanding of both regu-latory focus and upper echelons theories,and the consequent organizational out-comes, limitations do exist. For example,this study explored only the relationbetween executive regulatory focus andfirm performance in small firms. Resultsmight differ in medium to large firms inwhich the CEO does not have as muchinfluence. Research in that case shouldbe targeted at top management teamsrather than one specific individual (Ham-brick and Mason 1984). Future investiga-tions should also examine the specificstrategies that executives with a preven-tion or promotion focus pursue in lowand high dynamism environments. Spe-cifically, in turbulent environments,executives using a prevention focus mayseek the comfort and safety of strategicpersistence or strategic conformity,whereas an executive utilizing a promo-tion focus would perhaps venture into abroader array of strategic possibilities,particularly in small firms. Futureresearch should also investigate if dyna-mism actually changes a given execu-tive’s preferred regulatory focus. It couldbe that over time, a prevention-orientedexecutive that repeatedly operates withina highly dynamic environment mightbegin to prefer a promotion focus.Though our data cannot directly speak tothis possibility, it does hint that mostCEOs, at least in the present sample, aremore promotion oriented as the mean forpromotion focus was significantly higher


(p < .05) than the mean for preventionfocus. We encourage future research toinvestigate such possibilities. Futureresearch should also begin to examinespecific decision-making styles thatmight mediate the relationships betweenregulatory foci and performance. Thoughwe have taken an important step forwardby revealing relationships between regu-latory foci and performance under differ-ing levels of dynamism, the next stepshould be to examine mediators of suchrelationships, as well as other boundaryconditions to further unlock the “blackbox” (cf. Lawrence 1997).

Another possible limitation is due tothe difficulty in gathering data from theupper echelon of organizations. Thisstudy gathered data at one point in time,which could lead to some biases.However, to correct for this possiblelimitation, measures were gathered fromboth the CEO and another top manager.Yet this does not remedy any potentialissues arising from common methodvariance (CMV). To assess any potentialinfluence of CMV, we followed the rec-ommendation of Podsakoff et al. (2003)and conducted tests to determine if CMVis a potential threat to the findings pre-sented herein. First, a Harmon one-factor test was conducted (Podsakoffand Organ 1986), and results from thistest indicated four factors for both theCEO only reported data and the CEOand top manager data-driven models. IfCMV was a potential problem, we likelywould have found only one factor.Second, we conducted a series of confir-matory factor analyses (CFIs) followingthe guidelines recommended byWidaman (1985) and used by severalother researchers (e.g., Carlson andKacmar 2000; Carlson and Perrewe1999; Conger, Kanungo, and Menon2000; MacKenzie, Podsakoff, and Paine1999; MacKenzie, Podsakoff, and Fetter1993, 1991; Moorman and Blakely 1995;Podsakoff and MacKenzie 1994; Podsa-koff et al. 1990; Williams, Cote, and

Buckley 1989) to confirm the Harmontest. However, we were only able to doso using the CEO only data as there aretoo few participants (i.e., n = 70) for themodels to be specified using both CEOand top manager data. We first con-ducted a single-factor model in which allitems from our four measures wereallowed to load on a single factor. Thismodel did not fit the data well:c2

(495) = 1,996.23, RMSEA (Root MeanSquare Error of Approximation) = 0.19,CFI = 0.21, and SRMR (StandardizedRoot Mean Squared Residual) = 0.14.Next, we tested a four-factor model witheach of the items loading only on theirrespective constructs. This model fit thedata well: c2

(489) = 784.21, RMSEA = 0.07,CFI = 0.94, and SRMR = 0.06. Next, wetested a model that added another latentconstruct in which we allowed all itemsto also load on in addition to theirrespective theoretical latent construct. Inessence, this procedure controls for thatportion of the variance in the indicatorsthat might be attributable to thecommon method (MacKenzie, Podsa-koff, and Fetter 1991). This model alsofit the data well: c2

(452) = 745.17,RMSEA = 0.07, CFI = 0.94, and SRMR =0.05. Though this model improvedcertain fit indices, the c2 difference testindicated that the model did not signifi-cantly improve model fit (Dc2

(37) = 39.04,p > .05), indicating that CMV does notappear to be driving many of the rela-tionships in the present study. In fact,the common method construct onlyaccounted for 11 percent of the variancein the data, which is much less thanwhat was observed by Williams, Cote,and Buckley (1989), whereas thoseaccounted for by the constructs of inter-est was much larger (i.e., 54 percent).Future work in this area may benefitfrom a longitudinal design if data areavailable. Lastly, we encourage research-ers to replicate our findings using moreobjective financial performance datafrom organizations. Such replication

WALLACE ET AL. 597

would greatly strengthen the results andconclusions presented here.

ConclusionIn conclusion, we believe that

research into the psychological aspectsof top management allows for a greateramount of insight into the effectivenessof executives and their respective firm,above and beyond the demographic andfunctional backgrounds that have beenpreviously investigated (Hambrick 2007).Regulatory focus appears to be one fruit-ful theory in this regard. The currentresearch contributes to organizational lit-erature by demonstrating the effects thatregulatory focus of top managers has onoverall firm performance in dynamicindustries, and we encourage researchersto further integrate psychological aspectsof individuals in the upper echelons oforganizations.

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Appendix: All Survey ItemsRegulatory Focus

1. _____ I often think about the person I would ideally like to be in the future2. _____ I often worry about that I will fail to accomplish my goals3. _____ I typically focus on the success I hope to achieve in the future4. _____ I often imagine myself experiencing good things that I hope willhappen to me

5. _____ I frequently think about how I can prevent failures in my work life6. _____ I am more oriented toward preventing losses than I am towardachieving gains

7. _____ My major goal right now is to achieve my ambitions8. _____ My major goal is to avoid becoming a failure and not reach my goals9. _____ I see myself as someone who is primarily striving to become theperson I “ought” to be—to fulfill my duties, responsibilities, and obligations

10. _____ I see myself as someone who is primarily striving to reach my “idealself”—to fulfill my hopes, wishes, and aspirations

11. _____ I am more oriented toward achieving success than preventing failureor benefits with that role

12. _____ I am anxious that I will fall short of my responsibilities and obligations

Items 1, 3, 4, 7, 10, and 11 are promotion-focused items; 2, 5, 6, 8, 9, and 12 areprevention-focused items. Scale adapted from Lockwood, Jordan, and Kunda(2002).

Dynamism

1. _____ There is little need for our firm to change its marketing practicestokeep up with competitors.

2. _____ The rate at which products/services are becoming obsolete in theindustry is very slow.

3. _____ Actions by competitors are very easy to predict.4. _____ Demand and consumer tastes are very easy to predict.5. _____ I talk about their most important values and beliefs.6. _____ Technological advances within the industry are easy to predict.7. _____ Consumer demand for our products is very stable.

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Firm Performance

1. ___ Funds allocated to R&D activities2. ___ Funds allocated to advertising3. ___ Return on assets4. ___ Return on sales5. ___ Sales growth6. ___ Overall financial performance7. ___ Stability/growth of employment8. ___ Process innovations9. ___ Product innovations

10. ___ Compensation of employees11. ___ Employee morale/job satisfaction12. ___ Customer relations13. ___ Supplier relations14. ___ Overall nonfinancial performance


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