CEO Self‐Regulation and the Cost of Equity Capital

ABSTRACT We explore the association between CEO self‐regulation and the cost of equity capital by distinguishing between two dimensions of regulatory focus—promotion focus and prevention focus—based on Higgins' (1997) framework. A promotion focus prioritizes positive stimuli, accomplishment, and growth, while a prevention focus emphasizes negative stimuli, safety, responsibility, and security. We find that firms led by CEOs with a stronger promotion focus exhibit a lower implied cost of equity capital, particularly when agency problems are more severe and external uncertainty is greater. However, we find no significant association between CEO prevention focus and the cost of equity. Furthermore, CEO promotion focus appears to be associated with greater investment efficiency, lower risk, and higher future profitability. These results are unlikely to be attributable to endogeneity concerns or other CEO traits. Overall, this study highlights the importance of executive psychological attributes in shaping capital market perceptions and, consequently, the cost of raising equity capital.