Corporate Investing as a Response to Economic Downturn: Prospect Theory, the Behavioural Agency Model and the Role of Financial Slack

Abstract

This study examines innovation investment during the major economic downturn of 2008–2009. Drawing from prospect theory, it suggests that increasing levels of slack resources enhance innovation investment during a crisis; slack resources also moderate the impact of historical performance on investment. This study also examines how, during global crises, the board of directors can affect the CEO 's proclivity to invest by leveraging performance management devices, such as target‐setting and behavioural evaluation criteria. A test based on a sample of Italian companies provides support for the hypothesized effects. Results suggest that firms may respond to global crisis with innovation investment, and that organizational factors, as well as the board of directors, may play a major role in this response.