Performance Feedback and Firms’ Relative Strategic Emphasis

Abstract

The study investigates how performance feedback––the discrepancy between actual performance and the aspiration level–– relates to firms’ relative strategic emphasis on value-creation (VC) over value-appropriation (VA), and how this relationship is contingent on two mechanisms: board independence and media coverage. By using a sample of 7460 firm-year observations covering 1558 publicly-listed Chinese companies during 2011––2017, we find that as a firm’s performance falls below aspiration, it is more likely for it to put its strategic emphasis on VC over VA. However, as performance rises above aspiration, the firm’s probability of emphasizing more on VC over VA increases up to a certain point after which it decreases, showing up an inverted U-shaped relationship. The results also show that board independence and media coverage moderate the relationship between performance feedback and firms’ relative strategic emphasis on VC over VA. Specifically, board independence weakens the negative effect of negative performance feedback and strengthens the inverted U-shaped effect of positive performance feedback; while media coverage strengthens the negative effect of negative performance feedback and weakens the inverted U-shaped effect of positive performance feedback.