Regulatory Focus and Corporate Investment

This study examines the effect of regulatory focus on corporate investment by investigating firm-level panel data. The regulatory focus theory explains individuals' perceptions in decision-making processes by suggesting 2 types of regulatory focus-promotion focus and prevention focus. I suggest the hypothesis that the difference between promotion focus and prevention focus in terms of investment decisions and behaviors depends on risk attitude and time horizon. To examine the hypothesis, I use regression techniques such as pooled regression and fixed effects, feasible generalized least squares, and dynamic generalized method of moments estimation methods. The empirical findings are as follows: (a) ordinary investment increases as the firm is more prevention-focused; (b) the positive effect of a prevention focus is significant only in the prevention-focused group; (c) as the degree of prevention focus increases, research and development investment first decreases, and then increases beyond an inflection point, that is, a U-shaped pattern exists; (d) the effect of regulatory focus on investment is pronounced in small firms; (e) the static panel regressions show that the investment- cash flow sensitivity is higher in the promotion-focused group than in the prevention-focused group; and (f) the dynamic generalized method of moments regressions report that the investment-cash flow sensitivity is higher in the prevention-focused group. To our knowledge, the present study is the first to provide empirical evidence that the regulatory focus theory can be a useful tool for understanding corporate decisions and behavior.