The Value of Strategic Loss: When Does Persistent Accounting Loss Lead to Long-term Firm Success?

Abstract

Persistent accounting loss can be a harbinger of organizational decline, and therefore, strategy scholars seek to identify conditions by which a firm may turn itself around from such trend. However, in the U.S. public equity market, in which loss is prevalent and longer, the market sentiment for persistent loss is quite positive. In this study, we draw insights from the literature on threat rigidity and strategic intent to revisit existing perceptions and conceptualizations about loss and its consequences on a firm’s long-term performance. We theorize about the cost of quick turnarounds caused by the perceptions of threat and about the long-term benefits of persistent loss driven by strategic intent. Using a propensity score matching technique, we find supporting evidence that the long-term performance of firms with strategic intents during a period of persistent loss is better than that of firms that make quick turnarounds. Also, the positive effect of strategic loss is more salient when firms have more intangible assets and when the industry has a more concentrated structure.