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Situational and Institutional Determinants of Firms' R&D Search Intensity
Abstract
Our theory extends the situational considerations explaining firm R&D search intensity beyond the behavioral theory of the firm by including shifts in the focus of attention among bankruptcy, aspirations, and slack. We also allow that search can reflect institutionalized investment patterns within firms and industries. We find stable firm-specific R&D investment patterns (i.e., institutionalized search) and variations in R&D intensity depending on firms' situations—including performance relative to aspirations, proximity to bankruptcy, and slack. Our empirical results evidence shifts in the focus of attention relevant to explaining R&D search intensity for subsamples of firms in different situations. Copyright © 2007 John Wiley & Sons, Ltd.
... The effect of business performance feedback on innovation has prompted numerous studies (e.g., Chen, 2008;Chen & Miller, 2007;Greve, 2003;He, Huang, & Yang, 2021;Jirásek, 2019;Yu, Minniti, & Nason, 2019). The behavioral theory of the firm offers a solid foundation for the literature performance evaluation, search, and decision-making (Cyert & March, 1963). ...
... In addition, Sitkin and Pablo (1992) suggested that negative situations encourage risk aversion through threatrigidity responses. Several studies have used firms' proximity to bankruptcy to examine the threatrigidity effect and have shown that firms performing far below aspirations may develop conservative, risk-averse tendencies (Chen & Miller, 2007;Liu et al., 2013). Therefore, firms may decrease their R&D investment when they are greatly underperforming. ...
... Firms focus more on the reference point closest to their current position (March & Shapira, 1992;Ref & Shapira, 2017). Underperforming firms focus on aspirations when their performance is in the neighborhood of aspirations; furthermore, they initiate problemistic search and prefer to take risks, such as increasing R&D investment, to improve their performance (Chen, 2008;Chen & Miller, 2007). When their performance falls well below aspirations, firms tend to focus more on survival, avoid risk and choose conservative strategies, in which the threat-rigidity thesis plays a leading role (Iyer & Miller, 2008;March & Shapira, 1992). ...
The management literature has extensively explored how firms respond to underperformance through innovation, with prior studies based on the behavioral theory of the firm and the threat-rigidity thesis producing inconsistent results. The shifting focus of attention model provides crucial insights to reconcile this contradiction. We extend this model by highlighting the temporal dimension of performance shortfall. Specifically, we argue that underperformance duration flattens the inverted U-shaped relationship by attenuating both the problemistic search and threat rigidity mechanisms. The empirical results from a sample of Chinese listed manufacturing firms between 2010 and 2019 support our predicted inverted U-relationship between underperformance intensity and research and development (R&D) investment, and the moderating effect of underperformance duration. Interestingly, the inverted U-shape flips to a U-shape if underperformance extends into the long term. We contribute to the literature on performance feedback by considering both underperformance intensity and duration, which conceptualizes their interaction and reconciles extant contradictory findings from a new perspective. We also add new insights into innovation research by theorizing and examining the overlooked boundary condition for the curvilinear relationship between performance shortfalls and R&D investments, which calls for future research to explore the dynamics of the relationship and account for temporal effects.
... Thus, managers are allowed substantial discretion in deciding its usage. Given such 'irresponsible' (Levinthal and March, 1981, p. 309) nature, organisational slack is appropriate for the pursuit of initiatives with uncertain and unpredictable outcomes, including innovation (Greve, 2003a;Meyer, 1982;Singh, 1986;Chen and Miller, 2007;Chen, 2008). This argument indicates positive associations between organisational slack and risk-taking by organizations, which is one of the important but not always necessary antecedents of innovation. ...
... Others aim to uncover conditions under which effects of organisational slack are moderated by examining characteristics or contexts of decisions to employ organisational slack (Voss et al., 2008;Chen and Miller, 2007). For example, it is argued that such decision contexts as the presence of venture capital investors (Vanacker et al., 2013), weak creditor rights (Vanacker et al., 2017), high R&D intensity (Geiger and Makri, 2006;Deb et al., 2017), or market-sensing capacity of decision makers (Simsek et al., 2007) amplify positive effects of organisational slack on pursuits of new opportunities or entrepreneurial actions. ...
... Our aim in this paper is to contribute to the research of organisational slack by showing an alternative approach to reconcile mutually contradictory arguments concerning the association between organisational slack and the degree of risktaking by organizations. Some scholars argue for positive associations by characterizing organisational slack as resources (Chen and Miller, 2007;Chen, 2008;Greve, 2003a;Meyer, 1982;Singh, 1986). Others view slack as buffers to argue for negative associations (Bromiley, 1991;Jensen, 1986;Latham and Braun, 2009;March, 1988;Milliken and Lant, 1991;Palmer and Wiseman, 1999;Wiseman and Bromiley, 1996). ...
One remaining challenge in research on variable risk-taking by organizations is to reconcile mutually contradictory arguments on associations between organisational slack and organisational degree of risk-taking. We focus on moderating (rather than moderated) influences of organisational slack to argue that slack governs the strength of the association by unleashing the discretion of top management teams (TMTs), while the direction of the association depends on the characteristics of TMTs. Accordingly, as slack increases, organizations led by TMTs characterised by high-risk preference pursue risky search initiatives more aggressively, while decisions by TMTs characterised with low-risk preference grow more risk-avoiding. Our empirical examination of the Japanese electronic appliances industry from 2006 to 2017 empirically supports the argument with endogeneity robust inference on the coefficient of the slack variable. Organisational slack alleviates concerns over constraints on decisions, thereby unleashing discretion to pursue as well as to avoid search risk-taking.
... The dimension of availability is grounded in early work that sought to differentiate between different types of slack based on the "ease or quickness with which the slack resource could be recovered for potential redeployment" (Bourgeois & Singh, 1983: 43). These types ranged from slack that is characterized by high availability, which refers to resources that are not currently tied up in firm operations and are immediately available for use (Chen & Miller, 2007), to slack that is characterized by low availability, which refers to resources that need to be recovered or redirected from current operations for use elsewhere (Marlin & Geiger, 2015) or obtained from the external environment. Given that these differences in the availability of slack were explicitly defined through the lens of financial slack, subsequent work often used form-based designations, e.g., financial slack or HR slack, to define slack that varied in its availability, which contributed to the conflation of type and form that we highlighted above. ...
... For instance, there are limited insights into how different kinds of slack influence patterns of organizational search. While extant theorizing on slack-induced search assumes that having available 'slack' resources will lead to increased search activities as the firm seeks new opportunities (Bromiley, 1991;Chen & Miller, 2007;Greve, 2003a), whether, and how, different kinds of available slack influence patterns of search is unknown. Most studies on slack search treat slack as a unitary construct, not accounting for differences in the availability and fungibility of slack. ...
... However, later studies referred to Bourgeois and Singh (1983) for using the firm's working capital to sales ratio to measure available (Marlin & Geiger, 2015), recoverable (Chen, 2008), and overall slack (Uhlenbruck, Hughes-Morgan, Hitt, Ferrier, & Brymer, 2017). Similarly, while Singh (1986) used the working capital to sales ratio to measure absorbed slack (corresponding to recoverable slack in Bourgeois and Singh, 1983), his study is cited as a reference to use working capital to sales ratio to capture available (Chen & Miller, 2007) and overall slack (Alvarez-Gil et al., 2007). ...
Slack is a prominent construct in management research, shown to be relevant for a wide range of phenomena. Yet, despite slack’s prominence and breadth of application, our review reveals a lack of clarity and consistency in the categorization, theorizing, and measurement of various types and forms of slack. This has led to differences in the characterization and treatment of seemingly identical kinds of slack, which prevents the full exploitation of the conceptual depth of the slack construct and thus the creation of robust knowledge about slack resources. Based on a review of 229 studies which explicitly theorized about slack, we identify two fundamental dimensions of the slack construct—availability and fungibility—that allow us to: (1) systematize and integrate past research about slack and its implications for organizations; (2) enrich and expand theorizing on slack by advancing a novel typology for understanding slack resourcing decisions and orchestration in organizations; and (3) reinvigorate and open new directions for future research on slack.
... To address this gap, our study draws on the BTOF. The BTOF challenges the traditional view of firms as purely rational, profit-maximizing entities and instead posits that firms operate as goal-directed systems composed of individuals and groups with collective objectives (Chen and Miller, 2007;Cyert and March 1963). This theory has been widely used to model firm behavior, particularly under conditions of uncertainty, such as when pursuing innovation (Gaba and Bhattacharya, 2012;Greve, 2003). ...
... Accordingly, we draw on the BTOF, which emphasizes the critical role of aspiration levels in guiding firms' strategic decisionmaking. The BTOF posits that firms operate under bounded rationality, meaning they aim for satisfactory rather than optimal performance (Chen and Miller, 2007;Cyert and March 1963). Central to this theory is the concept of the performance-aspiration gap, which arises when there is a discrepancy between a firm's actual performance and its desired goals. ...
Climate change-induced disasters Behavioral theory of the firm (BTOF) Threat rigidity model Firm's history of natural disasters A B S T R A C T This study examines how climate change-induced disasters affect renewable energy innovation in United States-based firms. To this end, we utilized the behavioral theory of the firm and the threat rigidity model to investigate strategic decision-making in the context of environmental crises. We employed a difference-indifferences approach combined with meta-analysis. Further, we analyzed data from 2013 to 2018 and found a significant increase in renewable energy innovation following climatological disasters, marked by an effect size of 0.74. However, firms exceeding their aspiration levels exhibit a smaller impact, reducing the effect on renewable energy innovation by 0.273 units. Additionally, firms with a frequent history of climatological disasters showed a decrease in renewable energy innovation, with an effect size of-0.349. Our research contributes to green innovation literature, particularly to renewable energy innovation discourse under climate challenges. It extends the behavioral theory of the firm to contexts of climatic uncertainty and applies the threat rigidity model to determine organizational adaptation. The study introduces a novel moderator: the firm's history of natural disasters, linking firm age with disaster frequency and severity. These insights are vital for enhancing strategic decision-making in the business and policy-making contexts, amidst the growing climate change challenges.
... As an important measure of firms' research and development (R&D) efforts, R&D intensity is typically defined as the firms' total R&D expenses divided by total sales (Chen and Miller, 2007;Cohen and Levinthal, 1989). How does a firm's position within its alliance network impact the allocation of slack resources towards innovative activities? ...
... Our dependent variable represents the research expenses incurred by the firms adjusted to the size of the firm (Chen and Miller, 2007). The measure for R&D intensity was obtained by dividing R&D expense by firm total sales (Cohen and Levinthal, 1989). ...
... Performance feedback theory (PFT) posits that organizational performance relative to aspirations triggers responding actions and affects strategic decisions of firms (Cyert & March, 1963;Kotiloglu, Chen, & Lechler, 2021). Negative performance feedback, indicating organizational performance below aspirations, motivates firms to engage in problemistic search to access new knowledge and remedy the perceived challenge (Baum & Dahlin, 2007;Chen & Miller, 2007). Positive performance feedback, denoting organizational performance above aspirational levels, stimulates slack search to expand current businesses and sustain their superior positions (Jordan & Audia, 2012;Ref & Shapira, 2017). ...
... As shown in equation (2), social aspiration gap is measured by the discrepancy between focal firm's return on asset and the social aspirational level. In line with Chen and Miller (2007), we constructed two variables: Positive performance feedback was measured by the value of the social aspiration gap when it is positive, and 0 otherwise, to capture an overperforming performance of the focal firm; Negative performance feedback was scaled by the absolute value of the social aspiration gap when this is negative, and 0 otherwise, to reflect underperforming performance of the focal firm. We then multiply performance feedback by 100 simply to make discussing the resulting coefficients easier. ...
While the importance of innovation alliance for high-technological firms is well-documented, existing literature provides little guidance on the role of performance feedback in an alliance governance structure choice. Drawing on performance feedback theory, this study sheds light on the association between performance deviating (either above or below) from firms’ social aspirations and the governance structure choice of innovation alliances. Using an unbalanced panel of Chinese biopharmaceutical firms spanning from 2007 to 2020, we find that firms experiencing negative performance feedback prefer a non-equity innovation alliance structure, whereas those with positive performance feedback are more likely to adopt an equity one. The strength of these relationships is contingent on top management team average tenure and educational-level diversity. Our findings both provide theoretical and practical insights into guiding how firms under different states of performance feedback select alliance governance structures.
... As suggested by Lim and McCann (2014), this 'backward-looking' approach or benchmarking performance against firm aspirations has been widely studied in various contexts. For example, the effect of positive and/or negative performance feedback (or attainment discrepancies, see Lant, 1992) on learning, achievement, and performance management (Lucas & Klangboonkrong, 2023), organizational learning (Audia & Greve, 2021), entering new markets (Ref & Shapira, 2017), mergers & acquisitions (e.g., Iyer & Miller, 2008), on research and development intensity (e.g., Chen, 2008;Chen & Miller, 2007), risk-taking (e.g., Chen, 2008), and organizational change (e.g., Greve, 1998) has generally been supported. ...
... Thus, HNPF equals the absolute value of the HAG if HAG < 0 and 0 otherwise, and HPPF equals the value of HAG if HAG > 0 and 0 otherwise. Organizations typically employ target benchmarks to navigate strategic choices, a practice that is particularly relevant to guiding subsequent strategic endeavors (Bromiley & Washburn, 2011;Chen & Miller, 2007;Cyert & March, 1963;Greve, 2003;Yu, Minniti, & Nason, 2019). These benchmarks, or aspiration levels, are established by evaluating the gap between desired targets and actual outcomes (Argote & Greve, 2007). ...
We propose that while positive performance feedback is positively related to firm sentiment, negative performance feedback is negatively associated with the firm sentiment. Additionally, overconfident Chief Executive Officers (CEOs) will improve the positive relationship between positive performance feedback and firm sentiment and reduce the negative relationship between negative performance feedback and firm sentiment. Using 7,182 firm-year observations for the 2004−2017 period, we show that positive performance feedback positively affects firm sentiment, and negative performance feedback negatively influences firm sentiment. We also found that higher levels of CEO overconfidence will minimize the negative impact of negative performance feedback on firm sentiment. Our research extends the current discourse on organizational impression management (proxied by firm sentiment) and CEO overconfidence research as we provide a nuanced relationship between firm performance feedback and organizational impression management. Our findings have theoretical and practical implications for corporate governance leaders and shareholders.
... According to the Theory of corporate Behavior, due to limited rationality, organizations tend to make "success" or "failure" judgments based on their own performance compared to expected performance [17]. When performance is below expectations, it stimulates managers to search for problems and seek changes; when performance exceeds expectations, it indicates that the company has achieved the desired goals and managers tend to maintain the status quo [18][19][20][21]. Thus, the enterprise performance feedback is an important factor influencing management decisions [22,23]. ...
... First, The performance expectation deficit is a deterministic risk [93] that stimulates entrepreneurial risktaking and drives strategic change in corporations [94]. When corporations face performance expectation insufficient, managers adjust resource allocation and increase R&D investment [95,96] to improve innovation efficiency [97] and realize increased corporate performance [18,20,21]. In addition, to reverse the disadvantage, firms will intensify their innovative behavior [98], resulting in a performance expectation deficit that will enhance green innovation dynamics [45]. ...
Purpose
The purpose of this study is to investigate the impact of performance feedback (performance expectation surplus, performance expectation deficit) on corporate ESG performance, and this paper also to investigate the role of environmental strategy as a mechanism in the impact of enterprises’ performance feedback on corporate ESG performance.
Design/Methodology/Approach
The study used data from 3679 companies listed on the Shanghai and Shenzhen stock exchanges for the period 2009–2021 and also measured the intensity of corporate environmental strategies through analysis. Finally, we used a fixed effects model to test the research hypothesis.
Findings
This study shows that enterprise performance feedback positively affects corporate ESG performance and that environmental strategy plays a significant mechanistic role in enterprise performance feedback and corporate ESG performance. Overall, performance expectation surplus negatively affects ESG performance, performance expectation deficit positively affects ESG performance, and the mechanism of environmental strategy plays a significant role in performance expectation deficit and ESG performance.
Practical implications
The results of this study can help enterprises establish a scientific environmental management system, strengthen the supervision of enterprise environmental management, and have certain reference significance for enterprises to speed up the implementation of environmental protection measures.
Originality/Value
This study adds to the literature by describing corporate ESG performance using performance feedback theory and explaining the inherent role of enterprise performance feedback in corporate ESG performance utilizing environmental strategies.
... A continuous increase in the gap between performance expectations can threaten the position of management. Managers are more tolerant of risk in order to regain desired performance to strengthen their position (Chen and Miller, 2007). Thus, in the later stages of digitalization, performance deficits mitigate the negative effects of digitalization on corporate resilience. ...
To investigate the relationship between digital transformation and corporate resilience in the face of external shocks, we empirically analyzed the relationship between digital transformation and corporate resilience in the context of COVID-19 by dividing corporate resilience into two dimensions: Resistance and recovery. The data in this paper came from manufacturing companies listed in Shanghai and Shenzhen A-shares from 2017 to 2021. The empirical results showed that there was a significant inverted U-shaped relationship between digitalization and corporate resilience. After rich robustness tests, the major findings of this paper hold. Performance surpluses and external competition positively moderate the inverted U-shaped relationship between digitalization and corporate resilience. Performance deficits negatively moderate the inverted U-shaped relationship between digitalization and corporate resilience.
... In the existing BTOF literature, performance feedback has become an important context, and numerous scholarly attention has been paid to study its effect on the firm's decision outcomes (e.g., Cyert and March 1963;Greve, 1998). Previous studies mainly focus on how performance relative to aspiration levels affects firm's strategies and actions like organizational change, acquisitions, and innovation (e.g., Chen and Miller, 2007;Greve, 1998;2003;Iyer and Miller, 2008). BTOF holds the view that performance feedback, especially performance below the aspiration level (negative attainment discrepancy), could lead to risk-takings. ...
The impact of environmental, social, and governance (ESG) performance gaps on firm green innovation is examined in this paper by a panel database of A-share Chinese listed companies from 2011 to 2021. Using multiple linear regression and conducting a series of endogeneity tests and robustness checks, our empirical analysis shows that firm ESG performance gaps have significantly positive effect on green innovation. Both ESG performance below historical aspiration and social aspiration levels enhance a firm’s green innovation. Confucian culture negatively moderates the positive relationship between ESG performance gaps and green innovation, suggesting that firms more influenced by Confucian culture exhibit reduced green innovation than those less influenced. Additionally, firm digitalization positively moderates the positive relationship between ESG performance gaps and green innovation, indicating that firms with higher levels of digitalization are better equipped to improve green innovation when facing ESG performance shortfalls. This study extends the existing knowledge of firm ESG performance and motivation of green innovation. The research findings offer practical insights for leveraging the motivation and capabilities of green innovation to attain firm ESG objectives.
... Relative firm performance. Following prior work (e.g., Chen and Miller, 2007;Huson et al., 2004;Lim and McCann, 2014;Miller and Chen, 2004), we measured firm performance relative to a firm's peers in the same industry (defined at the two-digit SIC level). To do so, we calculated relative firm performance as firm ROA in the focal year minus the median ROA of its peers based on Compustat data. ...
Despite the impact of CEO regulatory focus on a wide range of organizational outcomes, most research does not consider how regulatory focus can vary based on situational factors. Taking an interactionist perspective rooted in industrial‐organizational psychology, we propose that CEO regulatory focus exhibits variance driven by situational factors, namely, a CEO's job demands. Integrating this perspective with regulatory focus theory and research on executive job demands, we theorize and test the extent to which CEO regulatory focus is influenced by relative firm performance, with stakeholder activism and CEO tenure as moderators of this relationship. Using a sample of large U.S. companies, our tests offer evidence for how situational factors cause CEO regulatory focus to vary. We conclude our work by developing a research agenda regarding situational antecedents of CEOs' intrapersonal constructs more broadly.
... Target (firm) industry munificence. We calculated industry munificence as the percentage change in industry sales (collected all firms listed in Compustat) relative to the prior year based on four-digit Standard Industrial Classification (SIC) categories (Chen and Miller, 2007;Ferrier, 2001;Jancenelle, 2020). ...
Purpose
Drawing on the literature on technological acquisition and the knowledge-based view , this study examines how technological overlap between acquiring and target firms influences acquisition premiums. We further explore how the resulting synergies are contingent on the dynamic characteristics of the target firm, specifically its technology clockspeed and industry munificence. Technology clockspeed indicates the pace of technological evolution, reflecting internal dynamic resources, while industry munificence represents the abundance of external resources. These boundary conditions illustrate the dynamics of synergies, explaining their moderation effects on acquisition premiums.
Design/methodology/approach
We analyze a sample of 369 technological acquisitions by publicly traded U.S. firms between 1990 and 2011. To test our hypotheses, we used the ordinary least squares regression model with robust standard errors clustered by acquiring firms. In the robustness checks, we applied the generalized estimating equations to account for non-independent observations in our sample and verified that the results were robust to an alternative two-way clustering approach.
Findings
We suggest that a low level of technological overlap between an acquiring firm and its target firm leads the acquiring firm to offer a high acquisition premium because of the expected synergistic potential that evolves from combining two distant technological bases. We further find that this effect is contingent on the target firm's technology clockspeed and industry munificence. Specifically, the negative effect is amplified when target firms exhibit a rapid pace of technological evolution, whereas it is weakened when target firms operate in highly munificent industries characterized by robust growth and abundant resource flows.
Research limitations/implications
This study has several limitations, but it offers opportunities for future research. First, our sample is limited to domestic acquisitions between U.S. publicly traded firms, which may restrict generalizability. Cross-border acquisitions could reveal different dynamics, as technology leakage and national security concerns might make technological overlap a more sensitive factor. Additionally, private firms were not included, and their distinct strategic considerations could provide further insights. Future research could explore post-acquisition data to validate these synergies and expand the scope to include international contexts and private firms for a comprehensive analysis.
Practical implications
Our findings highlight important implications for managers in technology sector acquisitions. This study underscores the need for a thorough evaluation of target firms to avoid misjudging synergies. Low technological overlap can heighten expectations for value creation, making it crucial for executives to accurately assess potential synergies to prevent overestimation. Managers should consider both internal resources and external industry conditions when evaluating synergies. Ultimately, these insights help managers offer informed prices that reflect true strategic synergies, adopting effective valuation practices to mitigate risks of financial overpayments and poor post-merger performance.
Social implications
The social implications of our findings emphasize the broader impact of acquisition decisions on innovation and competition within the technology sector. By ensuring accurate valuation and avoiding overpayment, companies can allocate resources more efficiently, fostering sustainable growth and innovation. This diligent approach can reduce the risk of corporate failures.
Originality/value
This study makes two key theoretical contributions. First, it identifies technological overlap as a critical determinant of acquisition premiums in technological acquisitions, addressing gaps in the literature that focused on CEO characteristics and managerial attention. Second, it expands the theoretical framework by highlighting the dynamic nature of synergies, influenced by the target firm's technology clockspeed and industry munificence. By integrating both acquiring and target firm characteristics, this study provides a relational perspective on value creation, explaining why firms pay high premiums and offering a more comprehensive understanding of the strategic motivations in technological acquisitions.
... To these ends, at a minimum there are the actors, policies, and general social context at play. For example, National Systems of Innovation (NSI) literature, which has been a dominant frame through which policy impacts of innovation have been conceptualized, tends to focus on structure and institutions while ignoring situational individual agency (Chen, 2008;Chen and Miller, 2007), and firm-level determinants in the micro-processes (Autio et al., 2014). For instance, policies affecting the entry of firms generally do not distinguish between "entry" and "post-entry" behavior, as the same policies may affect these behaviors quite differently (Autio et al., 2014;Autio et al., 2013a). ...
As important as clean technology innovation is in addressing the growing concerns of climate change, an under-socialized characterization of the antecedents of such social innovative activities limits practical understanding of the complexities inherent in relevant organizational or societal processes. This is particularly true in the design and implementation of public policies, given that characterization may hide salient implications regarding interventional efficacies. We explore the impact of heterogeneity in perceptions, attitudes, knowledge, and behavior regarding climate change within a nation, arguing that modern theories of entrepreneurship hold compatible views regarding the multilevel innovation process. To gain a better understanding of these underlying processes, we focus on the pivotal role of firm-level knowledge competence in impacting different forms of innovation across institutional contexts. Departing from existing theoretical perspectives which provide partial answers , our approach introduces a framework more consistent with this socially embedded perspective.
... Our results were robust when we used the number of employees to measure firm size. Also, because the literature suggests that underperforming firms have a higher tendency to engage in divestitures, such that the stock market might react differently to such deals (Audia & Greve, 2006;Chen & Miller, 2007;Kolev, 2016), we controlled for Tobin's Q and return on assets (ROA). Firm leverage can influence the performance implications of divestitures (Kolev, 2016); thus, we controlled for the firm's cash holding ratio (cash and cash equivalents divided by current liabilities) and debt ratio (the ratio of summated long-term debt and current liabilities to total assets) (Feldman et al., 2016). ...
This study examines the influence of firms' internal control weakness (ICW) reported under the Sarbanes-Oxley Act (SOX) on their subsequent divestiture decisions and the performance of these decisions. We argue that following ICW disclosure, firms are inclined to pursue corporate divestitures because such divestitures can reduce organizational complexity and help remedy firms' ICW. We also propose that the positive influence of ICW disclosure on divestitures is stronger when a firm has recently appointed a CEO, but weaker when there is a higher prevalence of ICW within the industry. Furthermore, we investigate the dual performance implications of divestitures following ICW disclosure. Although these divestitures, compared to divestitures not following ICW disclosure, are associated with higher stock market performance, they are also associated with slower sales growth for firms' core businesses. We present empirical evidence that supports our arguments using a sample of S&P 1500 firms from 2003 to 2020. This study advances corporate strategy research by highlighting the role of ICW in shaping corporate divestiture decisions and documenting the multifaceted performance implications of such divestitures.
... Moreover, the study evaluates the effect of COVID-19 on environmental expenditures. Following previous studies (Chen and Miller 2007;Linder 2016;Abdu and Jibir 2018;Zainudin et al. 2018), this study used firms' specifics, such as return on net worth (RONW), leverage (LEV), current ratio (CR), market capitalization (MCAP), and firm size (FS). Gross domestic product and inflation are the macroeconomic determinants. ...
This research aims to examine the association between firm-specific and macroeconomic determinants and environmental expenditures in the Indian manufacturing sector. Furthermore, it seeks to investigate the moderation effect of country-level governance and economic development on the association between macroeconomic, firm-specific, and environmental expenditures. The current study is based on 70 manufacturing firms for the period of 2011 to 2021. The dependent variable is environmental expenditures and the independent variables are firm-specific and microeconomic determinants. The results revealed that market capitalization and firm size have a positive and significant impact on environmental expenditures. On the other hand, inflation and the rule of law negatively and significantly affect environmental expenditures. Regarding the moderation effect, the results revealed that the rule of law and GDP positively moderate the association between inflation and environmental expenditures. Hence, this research has significant implications for corporate executives, financial experts, regulators, and other interested parties.
... This can suppress the growth of self-expression and creativity [39]. The business models chosen by Chinese executives are more robust, and their firms tend to avoid risky strategies and organizational change [40]. ...
This study investigates the effect of foreign executives on firms’ innovation performance and the mediation role of digital transformation in Chinese-listed firms from 2011 to 2021. Our findings indicate that the presence of foreign executives in top management teams promotes firms’ innovation performance by enhancing digital transformation. Further analyses show that foreign executives contribute significantly to improving firms’ radical innovation performance rather than incremental innovation performance. We also examine the moderating effect of negative performance feedback and financing constraints between foreign executives and innovation performance, finding that foreign executives can promote innovation performance particularly in firms with negative performance feedback and weak financing constraints.
... In particular, slack resources allow firms to experiment with new strategies (Hambrick and Snow 1977;Nohria and Gulati 1996) and pursue more innovative projects (Levinthal and March 1981). The availability of resources plays a crucial role in R&D intensity (Chen and Miller 2007). Both Li et al. (2008) and Zhou et al. (2017) find that, in China, state ownership tends to stimulate a firm's R&D activities due to its superiority in resource access. ...
Technological innovations are heterogeneous in nature; some are pioneering while others are not. Drawing on a series of theoretical studies, this paper offers empirical evidence on the differential effects of soft budget constraints on non-pioneering and pioneering innovations by using provincial-level data from China spanning from 2003 to 2015. Using a panel threshold model framework, we observe that soft budget constraints stimulate non-pioneering innovations but hinder pioneering innovations, with the hindering effects outweighing the stimulating effects. These findings underscore the importance of overcoming institutional path dependence and hardening budget constraints to foster the dynamic evolution of innovation modes.
... As problemistic search occurs to handle negative performance feedback [8], CEOs will find a way to reduce the gap between actual performance and their aspiration-level. For instance, CEOs might concentrate on strategy modification [19], increase R&D investments [48], or make product innovation [9]. In this regard, CEOs would increase their passion to modify previous dissatisfied results. ...
Based on the behavioral theory of the firm, we research how performance feedback influences the formation of CEOs’ passion. We articulate that previous performance directly increases CEOs’ passion. Specifically, positive affective outcomes (performance above aspiration-level) advance CEOs’ positive feelings and motivation toward the domains of success (obsessive passion). For instance, when a firm accomplishes performance objectives, such as reaching sales goals, CEOs’ positive feelings toward developing current products would be boosted. Moreover, negative affective outcomes (performance below aspiration-level) would also positively impact CEOs’ passion since the CEOs would endeavor to reduce the difference between performance and their aspiration-level. As such, performance feedback is a critical antecedent of CEOs’ obsessive passion. In addition, we apply human capital as a moderator between performance feedback and CEOs’ obsessive passion. Results based on multiphase survey data from 189 CEOs of Korean small- and medium-sized enterprises indicate that both positive and negative performance feedback positively increase CEOs’ obsessive passion. Moreover, human capital negatively moderates the relationship between positive performance feedback and CEOs’ obsessive passion and positively moderates the relationship between negative performance feedback and CEOs’ obsessive passion.
... various thresholds. Different thresholds may apply in different strategic contexts, whether applied at the peer group average (Bromiley 1991) or at multiple levels representing different regimes of financial stability (Chen and Miller 2007). I augment the Bromiley (1991) switching model with firm performance relative to the social aspiration level driving firm behavior. ...
Management research has broadly categorized strategic motivations for corporate social responsibility (CSR) as profit-seeking or legitimacy, which are at times conflicting and complementary. The nature of firm motivations has significant implications for firm-level and societal outcomes yet is not directly observable. In this study I theorize that strategic motivations may be inferred based on observed performance relative to context-specific groups of relevant peer firms. I integrate economics and strategic management traditions to develop both a theoretical framework and an empirical model of peer effects and their underlying strategic motivations, and employ a novel instrumental variables estimation that exploits unique aspects of a recent innovation in dynamic industry classification. Results indicate that firms select referent peers based on strategic context and shed new light on the multi-dimensional nature of CSR strategies, revealing subtleties of firm behavior often masked by traditional empirical approaches. Contributions to theory and opportunities for future research are highlighted.
... The intermediary variable is R&D investment, which is expressed by R&D investment intensity (R&D investment). Since the research on CEO's overseas experience and corporate performance in this paper is based on the perspective of innovation investment, based on the global standard determined by OECD and the practice of Chen & Miller (2007), it adopts the form of the percentage of R&D investment in the operating income of the current year. That is, research and development expenses at the end of the year/business income of the year to indicate the intensity of research and development investment of the company in the year. ...
As the most important participant in the implementation of innovation strategy, the CEOs is one of the most important executives of the company. A large number of studies have shown that CEOs with overseas experience have an important impact on the company's decision-making, strategy and performance. However, does the CEOs' overseas experience affect the corporate performance? Does R & D investment play an intermediary role between a CEOs' overseas experience and corporate performance? What factors are regulated when CEOs' overseas experience act on R & D input? This paper is constructed on the basis of the existing relevant literature, based on the resource-based theory, using the gradual regression method to study the influence of the CEOs on R&D investment and the corporate performance, the mediation effect of R & D investment on the CEOs' overseas experience and the corporate performance, and the influence of the CEOs through R&D investment.
... It is triggered in response to failures and facilitates adaptation that addresses these by promoting and introducing innovation activities of firms. These have been identified as behavioral consequences such as R&D investment [33], [34], [35], [36], risk-taking [37], strategic change [38], and capital expenditure [39]. These lead to changes in the previous innovation trajectory and prevent future failures [8], [26]. ...
The question persists whether failures are invariably negative and therefore, something that should be avoided. The literature is inconclusive and offers mixed results, which include positive and negative effects of failure, along with claims that not all firms always benefit from them. This study aims to reevaluate the failure-innovation performance relationship. By conducting a quantile regression analysis, this study reveals that only firms beyond a threshold level of innovativeness may benefit from their experiences of failure. Moreover, firms with high innovation performance benefit more from their innovation failures than those with low innovation performance. Our results suggest that the relationship between failure and innovation performance differs at various levels of innovation performance.
We investigate effects of culturally situated differences in cognition on Japanese and US firms’ responses to performance feedback through R&D investments. Performance feedback research has mostly assumed a universal nature of decision makers’ cognition and responses. We posit firms from Japan should have a more holistic cognitive orientation than US firms, making them less responsive to problemistic and slack search mechanisms of performance feedback when making R&D investments. These expectations are largely supported in the context of 37 Japanese and 19 US automotive firms (546 firm-year-observations) from 2003 to 2019. We find further support using data on 106 global automotive firms (902 firm-year-observations), from 14 holistic or analytic oriented countries. This study establishes the culturally situated cognitive-orientation theoretical construct as a moderator of problemistic and slack search. Additionally, managers could adopt decision-making processes reflecting both holistic and analytic cognitive orientations while responding to performance feedback, to avoid biases.
Performance gap recognition derives from social comparison with rivals. We propose that the attribution of these gaps to foreign direct investment (FDI) inadequacy – and thus the likelihood of responding with FDI – is also guided by such social comparisons. Specifically, the performance gap becomes a stronger trigger for foreign market investment when underperforming peers are less engaged in FDI than outperforming counterparts, as this highlights the role of FDI scarcity in explaining the gap. Similarly, a firm's lower FDI involvement increases the performance gap's capacity to trigger FDI by making FDI inadequacy a more plausible explanation, whereas extensive existing FDIs shift the blame away from FDI insufficiency. By examining the locus of investment activity under the performance gap, we show that the associated FDI‐triggering capacity is limited to institutionally proximate environments where the upside potential for addressing the performance gap can be recognized upfront through current models, methods, and resources. Institutionally distant investments, whose potential evolves through experimentation with the local context, become increasingly unlikely as a firm falls behind its rivals. These findings suggest that a firm's response to the performance gap is shaped by inferences about the causes of underperformance and the clarity of an alternative's capacity to address the gap.
Research on the behavioral theory of the firm (BTOF) highlights the role of performance shortfalls in managers' decision process. However, previous studies tend to ignore the heterogeneity of historical and social aspirations. This paper investigates how firms' green innovation, a typical environmental behavior, differently responds to financial performance shortfalls relative to historical and social aspirations. Based on the view of problemistic search, we argue and find that financial performance shortfalls derived from historical aspiration impair green innovation, whereas financial performance shortfalls derived from social aspiration first reduce and then promote green innovation, demonstrating a U ‐shaped relationship. Moreover, we find that the two aspirations may interact to influence green innovation activities. Specifically, the negative effect of performance shortfalls (historical) is more pronounced when the financial performance is below social aspiration, whereas the U ‐shaped effect is flattened if the financial performance is at or above historical aspiration. Further, we explore how the effects vary with financial constraints and manager overconfidence to distinguish the underlying mechanisms. Our study extends a nascent understanding of aspiration heterogeneity by revealing firms' different green innovation strategies in response to different aspirations.
High‐performing enterprises committing to Corporate Environmental Responsibility (CER) is a prevalent phenomenon in emerging markets. However, the theoretical underpinnings of this phenomenon remain underdeveloped. Drawing on the behavior theory of the firm and a panel data of Chinese listed companies covering the period 2010–2020, we build a moderated mediation framework to explain the CER commitment of high‐performing enterprises, and we further examine the mediating role of sustainable business model innovation and the moderating role of digital capability. We find that (1) enterprises' performance aspiration surplus leads to an increasing commitment to CER, (2) high‐performing enterprises can foster CER through executing sustainable business model innovation, and (3) the direct and indirect (via sustainable business model innovation) effects of performance aspiration surplus on CER are favorably moderated by digital capability. This paper contributes to the literature of CER and provides strategic insights for high‐performing enterprises to undertake sustainable business model innovation.
We conduct an experiment to examine how providing decision makers with high versus low peer performance information influences choices between exploration and exploitation. Previous work on organization-level learning suggests that a high-performing peer would fuel exploration, whereas a low-performing peer would dampen it. In line with this, we find that individuals who receive information about a high-performing peer explore more than those who receive information about a low-performing peer. However, we also find that compared to individuals with a low tendency to self-enhance, individuals with a high tendency to self-enhance are less likely to explore when receiving information about a high-performing peer. In fact, these individuals explore at levels comparable to those who receive information about a low-performing peer. We explain this behavioral pattern by demonstrating that as individuals learn and improve, information about a high-performing peer increasingly results in mixed performance feedback; under these conditions of relative interpretive flexibility, exploration is moderated by decision makers’ tendency to self-enhance. When these individual dynamics are aggregated, our data suggest that an organization that provides peer performance information may experience either the same or less exploration than an organization that does not, with the exact difference depending on its proportion of high self-enhancers. These insights into the contingencies and aggregate effects of how individuals interpret and respond to peer performance information are particularly relevant given recent interest in designing organizations that shape employee behavior through the provision of feedback rather than through traditional instruments of coordination and control, such as incentives or hierarchy.
Funding: This work was supported by Danmarks Frie Forskningsfond [Grant 25194]. Additionally, this research was supported by a grant from the HEC Paris Foundation.
Open government data has become an important movement for government administrations in numerous countries. Previous studies have paid less attention to the complex relationship among the historical performance gap, the readiness of government (including policy and action dimensions), and open data quality. Therefore, on the basis of performance feedback theory, a theoretical model has been developed and tested to analyze the impact of the historical performance gap on the readiness of government and open data quality. The model is empirically tested by the partial least squares method using sample data from 115 countries. The results show that the historical performance gap could indirectly contribute to a country's open data quality by promoting the readiness of government. In addition, the impact of this gap on the readiness of government and open data quality shows a U-shaped curve. In other words, a greater change in the effect of open data utilization in a country in the previous year entails a more significant promotion of readiness of government and open data quality in the next year. These findings drive governments to pay more attention to performance evaluation in open data and improve the readiness of government to improve their respective country's open data quality.
Corporate risk‐taking is key to a firm's ability to achieve competitive advantages. Drawing on the attention‐based view and the information‐processing perspective, we argue that firms with higher strategy disclosure intensity (i.e. greater frequency of ‘corporate strategy’ mentions in a firm's public disclosure) will allocate more attention to corporate strategy and develop stronger information‐processing capacities, enabling them to undertake more intensive risk‐taking. This is particularly true when investment opportunities are more abundant and the environment is more dynamic. In addition, corporate risk‐taking will lead to better financial performance when firms exhibit stronger strategy disclosure intensity. Findings from 3190 firms support our arguments. Overall, this study advances strategic management research by demonstrating that strategy disclosure intensity provides important insights into a firm's risk‐taking decisions and performance.
The attention‐based view posits that a firm's allocation of attention to particular issues directly influences its actions and performance. Yet, the impact of attentional uniqueness – how the pattern of a firm's attentional allocation diverges from its competitors within the same industry – on behaviour and performance remains underexplored. We argue for an inverted U‐shaped relationship between attentional uniqueness and firm performance, mediated by the frequency of growth actions. This is because a firm's attentional allocation shapes its reaction to problems, opportunities, and threats in the competitive landscape, resulting in its competitive advantage. To generate growth actions, a firm needs to have both a unique perspective and a general understanding of its industry. Furthermore, we propose that this relationship is contingent on environmental munificence, which reflects the presence of growth opportunities. Our analysis, leveraging structural topic modelling on annual security reports from 986 Japanese listed companies between 2004 and 2016, broadly supports these theoretical predictions.
We examine the role of ownership in organizational responses to performance shortfalls. State owners prize performance stability over being competitive and their firms thus frame performance shortfalls differently than private firms do. In particular, state-firms’ performance-stability orientation makes them respond to small performance shortfalls more readily than private firms do. They largely disregard performance comparisons with industry competitors, which more readily trigger divestitures at private firms. Comparisons among state-firms matter relatively more. We find empirical support for these propositions in the population of Chinese state and private firms publicly traded in Shanghai and Shenzhen Stock Exchanges from 2003 to 2019. The frame-contingent responsiveness we document extends theory of organizational behavior and adds important nuance to our understanding of state-firm inertia.
Research commonly assumes that performance gap relative to aspirations (manifested in the difference between a firm's actual ROA and its prior ROA as a referent) exerts a similar influence on organizational change as the performance gap relative to analysts’ earnings forecasts (reflected in the difference between a firm's actual earnings and earnings forecasts as a referent). However, these distinct types of referents from different sources are conceptually unique and operate differently, which could give rise to dissimilar behaviours. Because corporate performance information can emanate internally from agency‐driven firms and externally from financial analysts, we examine both in a unified framework. To facilitate a deeper understanding of these relationships, we investigate how alternate income streams from business unit (BU) performance at a lower level in the organizational structure moderate the way corporate managers remedy corporate performance shortfalls at a higher level. Our study contributes to the behavioural theory by examining distinct influences of corporate performance goals derived from internally‐ versus externally imposed referents and their interactions with BU performance on new market entry activities. Empirical evidence from a sample of multiunit firms publicly listed in the information and communication technology (ICT) sector over the period 1998–2016 supported the hypotheses.
Today, scholarly discourse has been primarily centered around the causes and consequences of enterprise environmental, social, and governance (ESG) practices. However, given that enterprises may encounter negative attainment discrepancies across several areas (scope) and endure negative discrepancies over an extended period of time (duration), the question of whether and how negative attainment discrepancy affects enterprise ESG practices remains unexplored. Based on the behavioral theory of the firm, this study explores the differentiated impact of the scope and duration of negative attainment discrepancies on enterprise ESG practices, using Chinese A‐share listed companies (data from 2011 to 2019) as the research sample. Meanwhile, it investigates the moderating effect of multidimensional human capital in Top Management Teams (TMT) from technical background, overseas experience, and educational attainment. The results demonstrated that the scope of negative attainment discrepancy promotes enterprise ESG practice, while the duration of negative attainment discrepancy inhibits ESG practice. Furthermore, the TMT's technical background, overseas experience, and educational attainment strengthen the scope of negative attainment discrepancies in promoting enterprise ESG practice. Additionally, the overseas experience of the TMT reinforces the inhibitory impact of the duration of negative attainment discrepancies on enterprise ESG. The results of this study can provide the corresponding decision‐making suggestions and references for the senior management team and shareholders of enterprises.
Existing literature suggests that family ownership (FO) reduces exploratory innovation (ERI). Contrary to this conventional view, some family firms are among the world's innovation leaders. Our study aims to reconcile this discrepancy by examining the role of restricted and extended socioemotional wealth in the relationship between FO and ERI. We posit that while FO may inhibit the capacity for ERI due to rigid mental models and cognitive convergence, it fosters the willingness for ERI owing to a long-term orientation. We argue that FO exhibits an inverted U-shaped effect on ERI. Empirical evidence from 938 Chinese-listed family firms between 2011 and 2021 supports our hypothesis. Our findings indicate that FO's influence on ERI is not uniformly detrimental and that a moderate level of FO can promote ERI. Additionally, the latter generational stage (GS) attenuates the inverted U-shaped curve, implying that family firms in the latter GS may exhibit lower levels of ERI. This study offers theoretical and practical insights into FO and technological innovation research domains.
Purpose
This paper seeks to explore the effect of performance duration (rather than intensity) on the subsequent initiation of strategic change by firms. Specifically, the effect of outperformance and underperformance duration on strategic change, as well as the moderating effect of environmental dynamism, is studied.
Design/methodology/approach
Using a fixed-effects model, analyzing a sample of 34,907 firm-year observations from 1980 to 2018 across 112 industries mostly supported proposed hypotheses.
Findings
Results revealed a U-shaped relationship between outperformance duration and strategic change and an inverted U-shaped relationship between underperformance duration and strategic change. The moderation role of environmental dynamism was only partially supported.
Originality/value
This study examines a new dimension of performance feedback, namely duration, rather than the widely used intensity of performance feedback, to enhance our understanding of the behavioral theory of the firm.
Drawing on threat rigidity theory, this study hypothesizes that foreign competition driven by tariff reduction may negatively impact domestic firms’ risk-taking. Despite the inherent threats posed by intense foreign competition, domestic firms’ responses may vary. Thus, this study also hypothesizes that performance relative to aspiration and strategic conformity may mitigate the negative impact of foreign competition on domestic firms’ risk-taking. To test these hypotheses, this study examines sharp decreases in import tariff rates within U.S. manufacturing industries as a quasi-natural experiment, employing the difference-in-differences approach. The results strongly support the hypotheses, suggesting that while foreign competition indeed reduces domestic firms’ risk-taking, this effect is mitigated by performance relative to aspiration and strategic conformity.
In this paper, we introduce performance feedback models to specify conditions under which organizations' decision makers are more (or less) likely to accept the risk and uncertainty of nonlocal interorganizational partnership ties rather than prefer embedded ties with partners with which they have either past direct or third-party ties. Learning theory suggests that organizations performing far from historical and social aspirations may be more willing to accept the uncertainty and risk of such nonlocal ties with relative strangers. An analysis of Canadian investment banks' underwriting syndicate ties from 1952 to 1990 supports predictions from learning theory and, in addition, indicates that inconsistent performance feedback (i.e., performance above either historical or social aspirations but below the other) triggers the greatest risk taking in selecting partners.
Scholars from diverse disciplines have proposed numerous theories of business imitation. We organize these theories into two broad categories: (1) information-based theories, where firms follow others that are perceived as having superior information, and (2) rivalry-based theories, where firms imitate others to maintain competitive parity or limit rivalry. We describe conditions under which each type of imitation is most likely and offer guidance on identifying imitation in practice. Amplification effects and other performance implications of imitation are also addressed.
The study reported here uses learning theory to examine how performance feedback affects the probability of risky organizational changes that are consequential to an organization's performance. The theory predicts how decision makers interpret organizational performance by comparing it with historical and social aspiration levels. Empirical analysis of the consequences of performance short-falls on the probability of strategic change in the radio broadcasting industry shows clear sensitivity to social and historical aspiration levels. It also shows that changes seen or done by the station predict future change, suggesting that the recent experiences of organizations cause differences in capabilities and perceived opportunities, leading to differences in organizational inertia.
We used computer simulations to examine the role and interrelationship between search processes that are forward-looking, based on actors' cognitive map of action-outcome linkages, and those that are backward-looking, or experience based. Cognition was modeled as a simple, low-dimensional representation of a more complex, higher dimensional fitness landscape. Results show that, although crude, these representations still act as a powerful guide to initial search efforts and usefully constrain the direction of subsequent experiential search. Changing a cognitive representation itself can act as an important mode of adaptation, effectively resulting in the sequential allocation of attention to different facets of the environment. This virtue of shifting cognitive representation, however, may be offset by the loss of tacit knowledge associated with the prior cognition.
This paper explores the case for a general threat-rigidity effect in individual, group, and organizational behavior. Evidence from multiple levels of analysis is summarized, showing a restriction in information processing and constriction of control under threat conditions. Possible mechanisms underlying such a multiple-level effect are explored, as are its possible functional and dysfunctional consequences.
Organizational learning has many virtues, virtues which recent writings in strategic management have highlighted. Learning processes, however, are subject to some important limitations. As is well-known, learning has to cope with confusing experience and the complicated problem of balancing the competing goals of developing new knowledge (i.e., exploring) and exploiting current competencies in the face of dynamic tendencies to emphasize one or the other. We examine the ways organizations approach these problems through simplification and specialization and how those approaches contribute to three forms of learning myopia, the tendency to overlook distant times, distant places, and failures, and we identify some ways in which organizations sustain exploration in the face of a tendency to overinvest in exploitation. We conclude that the imperfections of learning are not so great as to require abandoning attempts to improve the learning capabilities of organizations, but that those imperfections suggest a certain conservatism in expectations.
9 Academy of Management Journal 1991, Vol 34. No 1. 37- 59 TESTING A CAUSAL MODEL OF CORPORATE RISK TAKING AND PERFORMANCE PHILIP BROMILEY University of Minnesota The determinants of organizational risk taking and its impact on eco- nomic performance are critical issues in strategic management. Using a model that included risk, performance, performance expectations and aspirations, slack, and industry performance, this research addressed how past performance and other factors influence risk taking and how risk taking and other factors influence future performance. Not only did poor performance appear to increase risk taking— risk taking ap- peared to result in further poor performance, even when past perfor- mance, industry performance, and organizational slack were con- trolled. Overall, the results favor a model in which low performance and lack of slack drive risk taking, but the risks taken have poor re- turns. Although risk has long been considered an important aspect of strategic choice, it is only in recent years that researchers in strategic management have become directly concerned with research on risk. Sparked by Bowman (1980, 1982, 1984), many recent studies of strategy have included risk mea- sures. Part of the attention has focused on what Bowman described as a paradox. Using a capital markets analogy. he predicted that risky projects and investments would need to offer higher earnings than other projects to be attractive and that by extension, variable income flows would be associ- ated with high average income Instead, he found negative associations be- tween variance in returns and the level of returns in some industries Since Bowman [1980], numerous studies have investigated risk—return connections. Fiegenbaum and Thomas (1985, 198r3] found some industries with positive associations between returns and varrance lI1 returns and some with negative associations. They also found that the associations varied over time. Fiegenbaum and Thomas (1988) reported a positive association be- Funding from the Graduate School of the University of fVllI1:lBSOia and the National Science Foundation under grant number SES—8618355 is gratefully acknowledged I thank Vi]ay Nayak and the St Paul Computing Center staff for assistance in executing this research Thanks are also due to Morison Asset Management and Lynch, Jones and Ryan for data on analysts’ fore- casts and to Maureen McNir.hols and John Hassell for data on th - association between corporate and analysts’ forecasts Comments from Raphael Arnit, Ned ltowman. Michele Govekar, Ian Maitland, ]im March. Alfred Marcus. Elaine lVl[)Scli(()\‘\/Slkl, l{tLl‘l.tI‘(l Saavedra, and this ;oiirnal‘s referees on previous versions of this article are gratefully (lCkn iwlvdged 37 Copyright © 2001. All rights reserved.
Scholars who study organizational decline have argued that declining organizations reduce or eliminate their riskier activities such as innovation. Further, they cite reduced risk-taking as a primary contributor to further decline. Scholars with an interest in risk per se come to the opposite conclusion: low performing firms often take more risks than other firms and such risks reduce subsequent performance. This study attempts to resolve these conflicting views by examining the risk of firms in decline.
Our model, based on Cyert & March's (Cyert, R. M., J. G. March. 1963. A behavioral theory of the firm. Prentice-Hall, Englewood Cliffs, NJ.) behavioral theory of the firm, includes six basic variables: (1) performance, (2) slack, (3) aspirations, (4) expectations, (5) risk (income stream uncertainty), and (6) organization size as a measure of decline. The estimated model includes prior levels of risk and performance in the risk and performance equations respectively as controls. This study uses data on 344 low-performing firms in 19 manufacturing industries to estimate a time-series model that addresses both decline's influence on risk and risk's influence on performance while controlling for firm slack resources and industry factors.
The results suggest (1) organizational decline and potential slack (debt/equity) positively influence risk whereas recoverable slack (SGA/Sales), and the difference between performance aspirations and expectations negatively influence risk; and (2) recoverable slack and risk negatively influence performance. We also examined the influences of performance and slack on organizational decline and found that performance associates negatively whereas recoverable and potential slack associate positively with decline.
These results challenge the argument that declining firms reduce risk and so hurt their subsequent performance. Instead, the results suggest a cyclical process with positive feedback in which decline and the loss of certain slack resources increases risk which in turn reduces performance and results in further organizational shrinkage. Thus firms facing decline fall into a trap of taking unprofitable risks that ultimately exacerbates the decline. In addition, results relating slack to risk and performance exhibited inconsistent relations across the measures raising questions about the role slack resources play in risk and decline. Previous discussions of this slack implicitly assume all forms of slack have similar influences but our results demonstrate different forms of slack have very different effects.
I base an integrated model of innovation development and launch on the behavioral theory of the firm. This model specifies that research and development expenses are increased when low performance causes "problemistic search" and when excess resources cause "slack search." Innovations generated by search are launched if low performance gives managers high risk tolerance. Using data from shipbuilding firms, I show that high performance reduces R&D intensity and innovation launches, and high slack increases R&D intensity, as predicted. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Empirical investigations of decision making indicate that the level of individual or organizational risk taking is responsive to a risk taker's changing fortune. Several nonstationary random-walk models of risk taking are developed to describe this phenomenon. Models portray a risk taker's history as the cumulated realizations of a series of independent draws from a normal probability distribution of possible outcomes. This performance distribution is assumed to have an unchanging mean and a variance (risk) that changes. Changes are seen as determined by (1) a focus of attention on 1 of 2 reference points (an adaptive aspiration for resources and the survival point) and (2) the relation between current resources and the focal point. The models are elaborated by examining the impact of adaptive aspirations and attention focus on risk taking over time in a cohort of risk takers and in a renewing population of risk takers. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
We examine how firms search, or solve problems, to create new products. According to organizational learning research, firms position themselves in a unidimensional search space that spans a spectrum from local to distant search. Our findings in the global robotics industry suggest that firms' search efforts actually vary across two distinct dimensions: search depth, or how frequently the firm reuses its existing knowledge, and search scope, or how widely the firm explores new knowledge. In this study, we examined how firms search, or solve problems (Nelson & Winter, 1982), to create new products. The ability to create new products is an important component of firm innovative capa-bilities. New products are a central mechanism whereby organizations diversify, adapt, and rein-vent themselves in changing market and technical conditions (Schoonhoven, Eisenhardt, & Lyman, 1990). Research has also demonstrated how new products improve the market share, market value, and survival of firms (Banbury & Mitchell, 1995; Chaney & Devinney, 1992). Yet, despite the attrac-tiveness, firms find it difficult to create new prod-ucts. Here, we explain a firm's performance in cre-ating products as a function of its search behavior. Organizational learning researchers have some-times argued that in their search for solutions to problems, firms position themselves in a unidi-mensional search space that spans the spectrum from exploitation to exploration (March, 1991). We suggest that firms' search, or problem-solving ef-We thank for comments and discussions on the earlier versions of this work. We are also grateful to a number of experts and researchers in the robotics indus-try for their time, insights, and suggestions. We espe-cially thank Risto Miikkulainen for assistance in writing the programs that were used to combine and analyze the patent and product data.
In this paper, we introduce performance feedback models to specify conditions under which organizations' decision makers are more (or less) likely to accept the risk and uncertainty of nonlocal interorganizational partnership ties rather than prefer embedded ties with partners with which they have either past direct or third-party ties. Learning theory suggests that organizations performing far from historical and social aspirations may be more willing to accept the uncertainty and risk of such nonlocal ties with relative strangers. An analysis of Canadian investment banks' underwriting syndicate ties from 1952 to 1990 supports predictions from learning theory and, in addition, indicates that inconsistent performance feedback (i.e., performance above either historical or social aspirations but below the other) triggers the greatest risk taking in selecting partners.
What makes organizations so similar? We contend that the engine of rationalization
and bureaucratization has moved from the competitive marketplace to the state and
the professions. Once a set of organizations emerges as a field, a paradox arises:
rational actors make their organizations increasingly similar as they try to
change them. We describe three isomorphic processes--coercive, mimetic, and
normative-leading to this outcome. We then specib hypotheses about the impact of
resource centralization and dependency, goal ambiguity and technical uncertainty,
and professionalization and structuration on isomorphic change. Finally, we suggest
implications for theories of organizations and social change.
A model of organizational change through adaptive search for new technologies is developed and explored. The model is in the tradition of behavioral models of organizational choice and learning associated with work by Winter, Nelson, and Radner, It permits the exploration of simultaneous organizational adaptation in search strategies, competences, and aspirations under conditions of environmental instability and ambiguity. The model exhibits the extent to which variation in organizational behavior and performance reflect the distributional consequences of simple adaptation in ambiguous environments, as well as some adverse consequences of rapid learning.
In this paper, we argue that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. We label this capability a firm's absorptive capacity and suggest that it is largely a function of the firm's level of prior related knowledge. The discussion focuses first on the cognitive basis for an individual's absorptive capacity including, in particular, prior related knowledge and diversity of background. We then characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. We argue that the development of absorptive capacity, and, in turn, innovative performance are history- or path-dependent and argue how lack of investment in an area of expertise early on may foreclose the future development of a technical capability in that area. We formulate a model of firm investment in research and development (R&D), in which R&D contributes to a firm's absorptive capacity, and test predictions relating a firm's investment in R&D to the knowledge underlying technical change within an industry. Discussion focuses on the implications of absorptive capacity for the analysis of other related innovative activities, including basic research, the adoption and diffusion of innovations, and decisions to participate in cooperative R&D ventures.
Organizational routines are considered basic components of organizational behavior and repositories of organizational capabilities (Nelson & Winter, 1982). They do, therefore, hold one of the keys to understanding organizational change. The article focuses on how the concept of organizational routines can be applied in empirical research to understand organizational change. We identify problems encountered in such research and present proposals for how to deal with them, in order to advance our knowledge of routines and our understanding of organizational change. Developing these themes, we also introduce the articles in the special section 'Towards an Operationalization of the Routines Concept'. Copyright 2005, Oxford University Press.
The authors assume that firms invest in R&D not only to generate innovations, but also to learn from competitors and extraindustry knowledge sources (e.g., university and government labs). This argument suggests that the ease of learning within an industry will both affect R&D spending, and condition the influence of appropriability and technological opportunity conditions on R&D. For example, they show that, contrary to the traditional result, intraindustry spillovers may encourage equilibrium industry R&D investment. Regression results confirm that the impact of appropriability and technological opportunity conditions on R&D is influenced by the ease and character of learning. Copyright 1989 by Royal Economic Society.
Organizational routines are considered basic components of organizational behavior and repositories of organizational capabilities
(Nelson & Winter, 1982). They do, therefore, hold one of the keys to understanding organizational change. The article focuses
on how the concept of organizational routines can be applied in empirical research to understand organizational change. We
identify problems encountered in such research and present proposals for how to deal with them, in order to advance our knowledge
of routines and our understanding of organizational change. Developing these themes, we also introduce the articles in the
special section ‘Towards an Operationalization of the Routines Concept’.
Organizations, like sponges, must have the capacity to absorb inputs in order to generate outputs, Researchers have developed theories of organizational absorptive capacity; researchers have also developed models of the effective generation of new products. The challenge lies in integrating the two research streams.
This study examines whether slack resources have differential effects on the extent of a firm’s response to environmental shifts. Using a sample of 30 airlines during the transitional period of industry deregulation, we found that the relationship between slack resources and the extent of a firm’s environmental response is contingent on the firm’s pattern of resource allocations. Specifically, our results show that as firms allocate more resources toward activities which enhance external market effectiveness, increases in slack increase the extent of their environmental response. Conversely, as firms allocate more resources to activities that enhance internal efficiency, increases in slack decrease the extent of their environmental response. The implications of these findings are discussed. In particular, we examine these findings relative to the ongoing debate concerning the role slack plays in organizational adaptation processes.
March and Shapira's (1987, 1992) model of managers' risk preferences allows for shifts in attention between survival and aspiration levels. Our study provides initial empirical tests of their model using organizational data. We found that the variables affecting risk and the sizes (but not the signs) of these effects differed across performance categories. Organizations performing poorly showed increased risk as they neared bankruptcy. Other firms showed lower risk as performance improved relative to aspirations.
This paper presents an intraorganizational ecological perspective on strategy making and examines how internal selection may combine with external selection to explain organizational change and survival. The perspective serves to illuminate data from a field study of the evolution of Intel Corporation's corporate strategy. The data, in turn, are used to refine and deepen the conceptual framework. Relationships between induced and autonomous strategic processes and four modes of organizational adaptation are discussed. Apparent paradoxes associated with structural inertia and strategic reorientation arguments are elucidated and several new propositions derived. The paper proposes that consistently successful organizations are characterized by top managements who spend efforts on building the induced and autonomous strategic processes as well as concerning themselves with the content of strategy; that such organizations simultaneously exercise induced and autonomous processes; and that successful reorientations in organizations are likely to have been preceded by internal experimentation and selection processes effected through the autonomous process.
Four different approaches for operationalizing organization slack through secondary financial data have been proposed (Bourgeois, 1981; Dimick & Murray, 1978; Marino & Lange, 1982; Wolf, 1971). In this paper these measures are organized into two types of oper ations: relative and absolute; and each is applied to a common group of firms. The relative measures agree to a significant degree on the classification of firms into high and low slack groups. The absolute measures do not, however, converge. Intertype comparisons (relative vs. absolute) indicate that the proposed operations do discriminate between these two aspects of the slack construct.
Two widely cited, yet disparate, theoretical views of the relationship between poor performance and subsequent organizational action appear in organizational research. The behavioral theory of the firm posits that poor performing organizations will make strategic changes in, for example, the products and services they offer. In contrast, the threat-rigidity perspective predicts rather conservative responses; poor performers are expected to rely on previous actions to reverse their poor outcomes. We examined these competing predictions using data from a regional sample of hospitals. The results offer support for the behavioral theory of the firm and no support for threat-rigidity. We derive several implications from these findings in an effort to guide future research.
This article suggests that there is an inverse U-shaped relationship between slack and innovation in organizations: both too much and too little slack may be detrimental to innovation. Two related mechanisms governing this relationship are proposed: Slack fosters greater experimentation but also diminishing discipline over innovative projects, resulting in the hypothesized curvilinear relationship. Comprehensive worldwide data on 264 functional departments of two multinational corporations support the prediction.
This paper develops a dynamic, stochastic growth system for money market fund families and tests how search behavior within this system affects fund family exit. The outcome of search behavior is measured as the time-varying parameters of the growth system, estimated by the Kalman filter. The results provide no evidence that the continuously updated coefficients influence the risk of failure. However, the cumulative amount of search generally affects exit positively, consistent with Hannan and Freeman's (1984) structural inertia theory. Founding conditions and money market fund performance are also important predictors of money market fund failure. These findings are discussed in the light of Bowman's (1963) theory of managerial coefficients and its applicability to simple industries like money market funds. The implications for future empirical studies on evolutionary growth systems are also discussed.
The central argument is that firm behavior is the result of how firms channel and distribute the attention of their decision-makers. What decision-makers do depends on what issues and answers they focus their attention on. What issues and answers they focus on depends on the specific situation and on how the firm’s rules, resources, and relationships distribute various issues, answers, and decision-makers into specific communications and procedures. The paper develops these theoretical principles into a model of firm behavior and presents its implications for explaining firm behavior and adaptation. © 1997 by John Wiley & Sons, Ltd.
This paper uses data on radio format changes to test hypotheses on innovations as catalysts for nonmimetic change in organizations. Innovations are difficult to interpret using existing schemata, causing organizations to search for information on the opportunities and threats implicit in observed innovations. Such search may lead to mimetic adoption of the innovation, or, more likely, to more varied nonmimetic change. Results show an effect of innovations on the rate of nonmimetic change in radio markets, with innovations in large or nearby markets having greater effect and innovations by large organizations having less effect. The social and competitive relations of the innovator to a given organization are thus modifiers of the catalytic effect. These findings have implications for theories of innovation, competition, and organizational isomorphism.
The assumption that ‘local search’ constrains the direction of corporate R&D is central in evolutionary perspectives on technological change and competition. In this paper, we propose a network-analytic approach for identifying the evolution of firms' technological positions. The approach (1) permits graphical and quantitative assessments of the extent to which firms' search behavior is locally bounded, and (2) enables firms to be positioned and grouped according to the similarities in their innovative capabilities. The utility of the proposed framework is demonstrated by an analysis of strategic partnering and the evolution of the technological positions of the 10 largest Japanese semiconductor producers from 1982 to 1992.
The process model of strategic business exit (SBE) maps the activities of different levels of management onto the business and corporate levels of strategy making involved in Intel Corporation's exit from its core dynamic random access memory (DRAM) business. The SBE process model contributes to the development of an evolutionary process theory of strategy making by conceptualizing the pattern of managerial activities through which resources and corporate competencies are internally redirected toward more viable business opportunities, and the strategic context of a core business dissolves. The SBE process model corroborates the usefulness of the Bower-Burgelman process model for conceptualizing strategy making in complex organizations.
Recognition of the firm's tendency toward local search has given rise to concepts celebrating exploration that overcomes this tendency. To move beyond local search requires that exploration span some boundary, be it organizational or technological. While several studies have encouraged boundary‐spanning exploration, few have considered both types of boundaries systematically. In doing so, we create a typology of exploration behaviors: local exploration spans neither boundary, external boundary‐spanning exploration spans the firm boundary only, internal boundary‐spanning exploration spans the technological boundary only, and radical exploration spans both boundaries. Using this typology, we analyze the impact of knowledge generated by these different types of exploration on subsequent technological evolution.
In our study of patenting activity in optical disk technology, we find that exploration that does not span organizational boundaries consistently generates lower impact on subsequent technological evolution. In addition, we find that the impact of exploration on subsequent technological evolution within the optical disk domain is highest when the exploration spans organizational boundaries but not technological boundaries. At the same time, we find that the impact of exploration on subsequent technological development beyond the optical disk domain is greatest when exploration spans both organizational and technological boundaries. Copyright © 2001 John Wiley & Sons, Ltd.
A large body of work argues that scientific research increases the rate of technological advance, and with it economic growth. The precise mechanism through which science accelerates the rate of invention, however, remains an open question. Conceptualizing invention as a combinatorial search process, this paper argues that science alters inventors' search processes, by leading them more directly to useful combinations, eliminating fruitless paths of research, and motivating them to continue even in the face of negative feedback. These mechanisms prove most useful when inventors attempt to combine highly coupled components; therefore, the value of scientific research to invention varies systematically across applications. Empirical analyses of patent data support this thesis. Copyright © 2004 John Wiley & Sons, Ltd.
This paper builds and tests a holistic model of risk in organizations. Using structural equations modeling, we disaggregated risk into two distinct components, managerial risk taking and income stream uncertainty, or organizational risk. This allowed us to identify an array of organizational and environmental antecedents that have either been examined in isolation or neglected in previous studies about risk. Our results suggest that both organizational and environmental factors promote risk taking. Further, we found strong support for behavioral theory of the firm and agency theory on risk but not upper echelons theory. Our data also suggest that environmental characteristics have a negligible direct effect on organizational risk. Instead, the environment’s impact on risk occurs primarily through managerial choices. Copyright © 1999 John Wiley & Sons, Ltd.
Organizations have been modeled as goal directed systems which use simple decision rules to adapt behavior in response to performance feedback. This paper examines the formation of organizational goals, or aspiration levels, over time in groups of individuals representing top management teams of simulated organizations. The analysis compares the empirical validity of an adaptive attainment discrepancy model with models derived from rational and adaptive expectations theories. The results suggest that the attainment discrepancy model, which is based on a simple decision rule of adjustment to performance feedback, provides the most robust description of aspiration formation. They are also informative with regard to the application of expectation models to aspiration formation: There is a great deal of similarity between these results and those of prior studies on expectation formation. In addition, the study finds that there tends to be an optimistic bias in aspiration formation, that adaptation is not consistently incremental, and that adaptive learning may, over time, lead to behavioral outcomes that are consistent with rationality.
This paper explores the relation between decision theoretic conceptions of risk and the conceptions held by executives. It considers recent studies of risk attitudes and behavior among managers against the background of conceptions of risk derived from theories of choice. We conclude that managers take risks and exhibit risk preferences, but the processes that generate those observables are somewhat removed from the classical processes of choosing from among alternative actions in terms of the mean (expected value) and variance (risk) of the probability distributions over possible outcomes. We identify three major ways in which the conceptions of risk and risk taking held by these managers lead to orientations to risk that are different from what might be expected from a decision theory perspective: Managers are quite insensitive to estimates of the probabilities of possible outcomes; their decisions are particularly affected by the way their attention is focused on critical performance targets; and they make a sharp distinction between taking risks and gambling. These differences, along with closely related observations drawn from other studies of individual and organizational choice, indicate that the behavioral phenomenon of risk taking in organizational settings will be imperfectly understood within a classical conception of risk.
Revisiting Cyert and March’s classic 1963 ‘Behavioral Theory of the Firm’, Henrich Greve offers an intriguing analysis of how firms evolve in response to feedback about their own performance. Based on ideas from organizational theory, social psychology, and economics, he explains how managers set goals, evaluate performance, and determine strategic changes. Drawing on a range of studies, including the author’s own analysis of the Japanese shipbuilding industry, he reports on how theory fits evidence on organizational change of risk-taking, research and development expenses, innovativeness, investment in assets, and in market strategy. The findings suggest that high-performing organizations quickly reduce their rates of change, but low-performing organizations only slowly increase those rates. Analysis of performance feedback is an important direction for research and this book provides valuable insights in how organizational learning interacts with other influences on organizational behaviour such as competitive rivalry and institutional influences.
Firm-specific technological competencies help explain why firms are different, how they change over time, and whether or not they are capable of remaining competitive. Data on more than 400 of the world's largest firms show that their technological competencies have the following characteristics: 1.1. They are typically multi-field, and becoming more so over time, with competencies ranging beyond their product range, in technical fields outside their ‘distinctive core’.2.2. They are highly stable and differentiated, with both the technology profile and the directions of localised search strongly influenced by firms' principal products.3.3. The rate of search is influenced by both the firm's principal products, and the conditions in its home country. However, considerable unexplained variance suggests scope for managerial choice.These findings confirm the importance of complexity and path dependency in the accumulation of firm-specific technological competencies, and show that managers are heavily constrained in the directions of their technological search. They also show the limits of the notion of competition through variety, given that the same specific field of technological competence is often essential to the development of a range of possible product configurations. Technological imperatives still exist.
According to various writers, organizational slack serves to reduce goal conflict, to reduce information processing needs, to promote political behavior, or to facilitate certain strategic behaviors. The salient feature is that the slack construct is usually discussed without a concurrent attempt at empirical measurement. In this article I propose several operational measures, and develop one that allows the use of secondary (financial) data.
In this paper, we examine the emergence of resources. Our analysis of technological capability acquisition by global U.S.-based chemical firms shows that the emergence of resources is inherently evolutionary. We find that path-creating search that generates resource heterogeneity is a response to idiosyncratic situations faced by firms in their local searches. Two such idiosyncratic situations—technology exhaustion and expansion beyond national markets—trigger firms in our sample to create unique innovation search paths. We also find that along a given path firms experiment in order to find the correct investment—in fact, some organizations seem to take a step backward for two steps forward—further demonstrating the evolutionary nature of the resource creation process. Copyright © 2004 John Wiley & Sons, Ltd. Peer Reviewed http://deepblue.lib.umich.edu/bitstream/2027.42/34618/1/401_ftp.pdf
Australian and New Zealand environmental economists have played a significant role in the development of concepts and their application across three fields within their subdiscipline: non-market valuation, institutional economics and bioeconomic modelling. These contributions have been spurred on by debates within and outside the discipline. Much of the controversy has centred on the validity of valuations generated through the application of stated preference methods such as contingent valuation. Suggestions to overcome some shortcomings in the work of environmental economists include the commissioning of a sequence of non-market valuation studies to fill existing gaps to improve the potential for benefit transfer. Copyright 2005 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd..