Attainment Discrepancy and Investment: Effects on Firm Performance

Abstract

The behavioral theory of the firm (BTF) posits that managers engage in problemistic search when they experience attainment discrepancy (performance falls below aspirations), in order to raise performance above the aspiration level. Yet, the performance consequences of problemistic search remain an open question. We find that investment in search, triggered by negative performance feedback, enhances firm value. We infer that performance discrepancy facilitates adaptation and improves performance via focused managerial attention and self- discipline. We also find that performance shortfalls relative to aspiration do not induce “swing for the fences” investment in search (by gambling on risky projects), and instead foster prudent value-enhancing investments that enhance the probability of making large gains and reduce the volatility of the firm’s stock returns. Furthermore, we also find that the threat of bankruptcy, the availability of slack and corporate governance mechanisms do not have any effect on the performance consequences of search, reinforcing our view of the primacy of performance feedback in value creation from investment in search.