Abstract
A behavioral theory of the firm provides insights into organizational search based on performance feedback. The prior studies have suggested that if a firm’s performance falls below aspiration levels, the firm is engaged in R&D investment as part of problemistic search. Although providing a useful view of organizational search behavior, existing research has limitations in shedding light on firms’ heterogeneity in problemistic search. In this respect, we posit that the differential effect of negative performance feedback on R&D investment is mainly derived from TMT compensation system. Specifically, this study predicts that depending on TMT pay gap, the positive relationship between negative performance feedback and R&D investment will differ. This study also suggests that as TMT incentive is long-term oriented, R&D investment as problemistic search will be strengthened. To test our hypotheses, we conduct an empirical analysis using firms in the U.S. machinery/computer equipment industry from 2000 to 2018. We find that the larger the TMT pay gap, the weaker the positive relationship between negative performance feedback and R&D investment, while the larger the long-term oriented TMT incentives, the stronger the positive link between negative performance feedback and R&D investment. We then discuss theoretical and practical implications of the results.
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