CFO co-option and R&D investments: The mediating role of CEO risk-taking incentives

This paper examines the influence of chief financial officer (CFO) co-option, defined as the appointment of a CFO by the incumbent chief executive officer (CEO), on research and development (R&D) investments. Drawing on the upper echelon (UE) theory, we argue that co-opted CFOs are more likely to internalize the strategic preferences for innovation of their appointing CEOs, reducing their monitoring role and amplifying the influence of CEOs over financial resource allocation, thereby facilitating greater R&D investments. We further argue that CEO risk-taking incentives serve as an important mechanism through which CFO co-option influences R&D investments because co-opted CFOs can reinforce CEO risk preferences by supporting compensation structures that incentivize risk-taking. Using a sample of 10,370 firm-year observations from 2011 to 2022, we find that CFO co-option is positively associated with the intensity of R&D investments and that this relationship is partially mediated by CEO risk-taking incentives, consistent with our arguments. These results extend the co-option literature by revealing that R&D investments are not only directly influenced through shared preferences but also indirectly through risk-taking mechanisms. Overall, these findings underscore the need for careful board oversight to balance innovation and risk.