Behavioral Theory Of The Firm Research Articles

How do aspirations work? Financial performance shortfalls and firms' green innovation

AbstractResearch 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.

Extending behavioral theory of the firm to new ventures: Dispositional optimism as a moderating influence on new product introductions in high-tech ventures

Extant literature has typically drawn from the behavioral theory of the firm (BTOF) to examine new product introductions in the context of well-established companies. This paper extends the behavioral theory of the firm to entrepreneurial firms and argues that jointly considering founders' dispositional optimism together with the performance feedback promises to yield a better understanding of new product introductions in new ventures. We analyze a longitudinal dataset on the activities of 344 newly founded high technology ventures in the United States. The key insight of our study is that when BTOF is applied to the context of nascent, entrepreneurial ventures, the personality and dispositional characteristics of the entrepreneur must be considered. Specifically, we find that performance attainment discrepancy leads to new product introductions, but only when the entrepreneur's dispositional optimism level is high.

Negative performance feedback and firms’ CSR strategy selection: Conformity or differentiation?

Drawing on the behavioral theory of the firm (BTOF), studies debate about whether underperforming firms will engage in more corporate social responsibility (CSR). In this study, we categorize CSR into CSR conformity and CSR differentiation, and find that underperforming firms are more likely to increase CSR conformity but decrease CSR differentiation. Furthermore, market strategy deviation strengthens the positive effect of negative performance feedback on CSR conformity and the negative effect on CSR differentiation. This study sheds new light on the debate over the relationship between negative performance feedback and CSR.

Inherit or innovate?–evidence from China’s auto industry’s new car series naming

The automotive industry introduces a sizable number of new automobile products annually. The naming of new products may have significant impact on their market performance. Diverging from prior research on the impact of product names, companies’ innovative consciousness endows them with a certain level of proactive positioning, thereby implementing independent naming strategies after considering product factors and consumer preferences passively. This paper analyzes the drivers of the market performance of sequential products on the naming of new products in Chinese automotive industry. We collected market share data and names of various car series from January 2007 to September 2022. Then, we calculated semantic distances between names and performed empirical tests. Our findings show that firms demonstrate a risk preference pattern contrary to traditional prospect theory when using the previous car series’ market share as a reference point. In the interplay between market orientation and risk preferences, the relationship between the market share of the last car series and the similarity in names between old and new car series follows an inverted U-shaped pattern. This study extends the discussion on risk preferences within the behavioral theory of the firm (BTOF) and proposes a decision mechanism for product naming that considers market and firm factors during the response phase of market orientation.

Underperformance duration and R&D internationalization: Institutional contingencies in an emerging economy

This paper, based on the behavioral theory of the firm (BTOF), examines the influence of underperformance duration on a firm’s R&D internationalization in terms of both scale and scope. We propose that, under the time pressure stemming from prolonged underperformance, firms increase the scale of their R&D internationalization to expedite the benefits of overseas R&D activities through enhanced synergy and learning effects. Simultaneously, they narrow the geographic scope of foreign R&D efforts to reduce the complexity of coordinating dispersed R&D locations. Additionally, we investigate how the institutional contingencies in emerging economies moderate the time pressure mechanism. We posit that state ownership weakens the relationship between underperformance duration and R&D internationalization strategies (both in terms of scale and scope), whereas regional institutional development strengthens it. We use Heckman’s two-step estimation on a sample of 485 Chinese multinational firms from 2009 to 2018, and find support for our hypotheses.

How strategic alliances shape problemistic search intensity: Evidence from responses to social and historical underperformance

Taking a social networks approach to the performance feedback model from the Behavioral Theory of the Firm (BTOF), we examine how a firm’s position within a strategic alliance network—and the structure surrounding that position—creates distinct pressures that differentially impact decision makers’ problemistic search intensity to social and historical underperformance. We test our predictions on a sample of 32,780 observations of the alliance networks of 4,726 firms and their R&D intensity from 2000–2015 and find results robust to numerous alternative specifications. Results indicate that highly centralized firms search more intensely in response to social underperformance and less intensely in response to historical underperformance. However, structural holes in the network reduce response intensity to social underperformance but increase response intensity to historical underperformance. We posit this is due to how altering one’s network cognitively shapes the perceived threat of status loss. Our study is both managerially and theoretically important, since firms increasingly rely on strategic alliances in the face of major disruptions including globalization, economic crises, and pandemics, and since strategic alliances are instrumental in shaping how firms set and respond to aspirational benchmarks.

Motivation and Ability: Unpacking Underperforming Firms’ Risk Taking

Do firms take more or less risk in response to performance shortfalls? Although the behavioral theory of the firm (BTOF) has been a guiding framework in this area, empirical evidence remains inconclusive. Moreover, empirical work has largely failed to distinguish between firms’ motivation to take risks and their ability to do so. In this study, recognizing the distinct roles played by these two components, we specifically focus on risk-taking motivation. Drawing on March and Shapira’s shifting-focus-of-attention model, we highlight that firms’ motivation to take risks is contingent on their chosen reference points and the shifts between them. We propose that, on average, risk-taking motivation exhibits a positive monotonic relationship with performance shortfalls, a sequence involving an initial increase, subsequent leveling off, and then a renewed increase. To advance the theory of risk-taking motivation, we extend our inquiry to consider the moderating effect of concern for firm survival and subsequently explore factors influencing this concern. Furthermore, we investigate a critical implication of differentiating risk-taking motivation and ability. Because of the mismatch between motivation and ability, underperforming firms take the greatest risks when their performance is moderately below aspirations, with motivation and ability being at moderate levels, leading to an inverted U-shaped relationship between performance shortfalls and risk taking. Empirical evidence derived from experiments and archival data supports our theoretical predictions. This study contributes to the BTOF literature by demonstrating that underperforming firms’ risk-taking behavior is jointly determined by their motivation, ability, focus of attention, and concern for survival. Funding: This work was supported by the Israel Science Foundation [Grant 677/20]. Supplemental Material: The online appendices are available at https://doi.org/10.1287/orsc.2020.13953 .

Sustainability-driven market impacts of climate change and firms’ renewable energy innovation: a conceptual analysis

PurposeThis paper aims to unravel the relationship between market-driven impacts of climate change and firms’ deployment of renewable energy (RE) innovation. The purpose is to understand how market-related forces, influenced by uncertainty, shape firms’ behaviour in response to climate change challenges.Design/methodology/approachDrawing on the behavioural theory of the firm (BTOF), the paper develops a conceptual model to decode the relationship between each category of market-driven impacts and the resulting RE innovation within firms. The model takes into account the role of uncertainty and differentiates between multinational enterprises (MNEs) and domestic firms.FindingsThe analysis reveals five key sources of market-driven impacts: investor sentiment, media coverage, competitors’ adoption of ISO 14001, customer satisfaction and shareholder activism. These forces influence the adoption of RE innovation differently across firms, depending on the level of uncertainty and the discrepancy between environmental performance and aspiration level.Originality/valueThis paper contributes to the literature in four ways. Firstly, it emphasises the importance of uncertainty associated with market-driven impacts, which stimulates different responses from firms. Secondly, it fills a research gap by focusing on the proactivity of firms in adopting RE innovation, rather than just operational strategies to curb emissions. Thirdly, the paper extends the BTOF by incorporating the concept of uncertainty in explaining firm behaviour. Finally, it provides insights into the green strategies of MNEs in the face of climate change, offering a comprehensive model that differentiates MNEs from domestic firms.

Influence of Host Governance and Investment Environment on MNCs' Innovative Partnership Strategies: Insights From the Transaction Cost Perspective and a Behavioral Theory of the Firm

Influence of Host Governance and Investment Environment on MNCs' Innovative Partnership Strategies: Insights From the Transaction Cost Perspective and a Behavioral Theory of the Firm

Sociopolitical and financial goals in state-owned manufacturers' expansion of production capacity: evidence from China

PurposeThe rapid, yet low-profit, expansion of the production capacity of state-owned enterprises (SOEs) represents a remarkable phenomenon. However, the motivation behind this key operational decision remains underexplored, especially concerning the prioritization of sociopolitical and financial goals in operations management. Drawing on the multiple-goal model in the behavioral theory of the firm (BTOF), the authors' study aims to examine how SOE capacity expansion is driven by performance feedback regarding the sociopolitical goal of employment provision and how SOEs differently prioritize sociopolitical and financial goals based on negative versus positive feedback on the sociopolitical goal.Design/methodology/approachThe authors' study uses panel data on 826 Chinese SOEs in manufacturing industries from 2011 to 2019. The authors employ the fixed-effects model with Driscoll–Kraay standard errors, which are robust to heteroscedasticity, autocorrelation and cross-sectional dependence.FindingsThe authors find that SOEs increase capacity expansion as sociopolitical feedback becomes more negative, but they may not increase capacity expansion in response to positive sociopolitical feedback. Moreover, negative profitability feedback strengthens SOEs' capacity expansion in response to negative sociopolitical feedback. In contrast, negative profitability feedback weakens their response to positive sociopolitical feedback.Originality/valueThe authors' study offers a novel behavioral explanation of SOEs' operational decisions regarding capacity expansion. While the literature has traditionally assumed multiple goals as either hierarchical or compatible, the authors extend the BTOF's multiple-goal model to illuminate when firms pursue sociopolitical and financial goals as compatible (i.e. the activation rule) versus hierarchical (i.e. the sequential rule), thereby reconciling their tension in distinct performance situations. Practically, the authors provide fine-grained insights into how operations managers can prioritize multiple goals when making operational decisions. The authors' study also shows how policymakers can influence SOE operations to pursue sociopolitical goals for public benefit.

(No) Time for Change: When and Why Entrepreneurs Act During Underperforming Fundraising Attempts

Entrepreneurs need to mobilize funds, but they do so under considerable uncertainty about resource holders’ preferences, leading often to fundraising attempts that perform below entrepreneurs’ aspirations. Past research has offered contrasting theorizing and evidence for why entrepreneurs then make changes to their product offering during such attempts as well as for why entrepreneurs refrain from taking such action. This paper develops and tests behavioral theory to reconcile this tension, explicating when and why entrepreneurs change their product offering during underperforming fundraising attempts. Specifically, we argue that entrepreneurs draw on three sources of information that are inherent to fundraising attempts and that inform the extent of their actions to change their product offering: the degree to which they perform below their own fundraising aspirations, the degree to which they fall below peer fundraising performance, and the time that remains until the deadline for the fundraising attempt. Longitudinal data on 576 fundraising campaigns (6,758 observations) published on the crowdfunding platform Kickstarter support our theory. By developing novel behavioral theory on when and why entrepreneurs take action during resource mobilization, we offer contributions to research on entrepreneurial resource mobilization, the crowdfunding literature, and the Behavioral Theory of the Firm. Funding: This work was supported by KölnAlumni. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2020.13803 .

ARTIFICIAL INTELLIGENCE AND INNOVATION PRACTICES: A CONCEPTUAL INQUIRY

Discourse on artificial intelligence runs noticeably along with the developments of computing technology. At the same time, the business environment become more uncertain, ambiguous, and competitive, which requires organizations to innovate for their sustainability continuously. This paper aims to broaden innovation management knowledge, particularly in applying artificial intelligence. The behavioural Theory of the Firm is a framework for writing this conceptual inquiry. To do so, artificial intelligence can assist organizations in processing information companies need to create incremental and radical innovations. Specifically, artificial intelligence is useful in overcoming barriers to innovation (during information processing and search processes) and generating and developing ideas and solutions. Furthermore, adopting artificial intelligence in innovation management is determined by the level of organizational capability in information processing, which consists of three levels: exploitation, expansion, and exploration. Then, economic, technological and social forces are argued as factors that can push organizations to adopt artificial intelligence. The challenges faced in the adoption process can come from technical aspects of technology, individual aspects, and interaction between technology and humans. The final part of this manuscript describes the future research agenda that can be carried out related to artificial intelligence and innovation management.

60th birthday of ‘A Behavioral Theory of the Firm’: a review of the relational concepts and recommendations for future research

AbstractThis year, we celebrate the sixtieth anniversary of ‘A Behavioral Theory of the Firm’ (BTF) (Cyert and March in A behavioral theory of the firm, Prentice Hall, Englewood Cliffs, 1963), which central ideas and concepts are fundamental to almost all theoretical and empirical work focusing on organizational decision-making. In particular, the four underlying relational concepts of BTF: (1) quasi resolution of conflict, (2) uncertainty avoidance, (3) problemistic search, and (4) organizational learning provide theoretical explanation for firms’ decision-making behavior. However, as literature has grown, focus of the studies and application of the concepts are becoming increasingly fragmented, leading to parallel and decoupled insights rather than cohesive and complementary explanations. We conduct a systematic literature review of 114 publications in top-ranked journals to provide a deeper understanding of the applications of BTF’s four relational concepts and their interrelation. Reviewing and synthesizing extant literature, we identify seven different organizational decision areas in which mainly two relational concepts, problemistic search and organizational learning, are applied to explain specific firm behaviors. The relational concept of quasi resolution of conflict and uncertainty avoidance seem underrepresented or almost neglected in the BTF-related research. Furthermore, we provide an integrative process framework connecting the four relational concepts and related research insights, and thereby, highlight opportunities for future research.

Attribute-based product reputation as a market signal: examining product safety recalls in the US auto industry

PurposeThis study examines how firm product reputation functions as an internal and external expectations-setting mechanism shaping firm and external stakeholder behavior.Design/methodology/approachLongitudinal analysis of 17,879 recalls from 15 automobile manufacturers operating in the United States between 1967 and 2016.FindingsApplying the behavioral theory of the firm (BTF) and signaling theory, this study’s findings suggest that product safety reputation creates variability in the likelihood of both voluntary and government-ordered recalls.Research limitations/implicationsPerformance expectations set by past product performance influence managerial decision-making such that products with a higher reputation for quality are more likely to be voluntarily recalled than are their less reputable counterparts. Similarly, regulators are more likely to order the recall of higher reputation products, suggesting that past product performance also influences enforcement behavior. Finally, the scope and severity of product defects are shown to interact with product reputation to influence the likelihood of government-ordered recall.Practical implicationsFirms and firm stakeholders make distinct decisions based on performance variations within firm product portfolios.Social implicationsOverall firm reputation is important, but there are distinct dynamics that result in product performance variability within firm product portfolios that have important implications on issues such as product safety recalls.Originality/valueThis study's findings reveal that as an internal signal, managers' expectations of product performance can change their behavior following product safety defects. Specifically, voluntary product recalls are more likely for higher-reputation products than those with lower reputations for product safety. This suggests that firm behavior regarding product safety recalls is not consistent within their own product lines. Externally, this study’s findings suggest that product reputation also influences relationships with key stakeholders. Product reputation for quality was shown to be associated with an increased likelihood of government sanctions. Regulators will also be more likely to initiate punitive sanctions against higher-reputation products as the severity and scope of safety defects increase. Under such circumstances, higher-reputation products are more likely to face government sanctions than lower-reputation products. Hence, government regulatory behavior is subject to influence from performance signals such as product reputation.

Unfinished business: integrating individual decision-makers' experience and incentives to organizational performance feedback theory.

In this study, we analyze the role of individual decision-makers in organizational decision-making that is described by the Carnegie perspective. In particular, building on the Behavioral Theory of the Firm, we analyze the influence of decision-makers on organizational responses to performance feedback. Managers in organizations can influence the performance feedback process through their individual experiences. Moreover, they are motivated and controlled by incentives, which is another mechanism by which organizational decision-making can be influenced by individuals. While the Carnegie perspective acknowledges that decision-makers interpret performance feedback and initiate organizational responses, individuals are not as closely integrated to the organizational performance feedback process as some other-mostly organizational-conditions. Recently, several intriguing empirical studies have addressed the role of experience and incentives in the performance feedback process. However, their cumulative effect remained impossible to assess. We meta-analytically review 205 BTOF studies to test our hypotheses on the influence of decision-makers' experience and incentives on organizational responses to performance feedback. We show that decision-makers' job experience and domain expertise influence organizational responses to performance below aspirations, while incentives and compensation become relevant when performance is above aspirations. These results highlight the importance of individual decision-makers in explaining variations in organizational performance feedback decisions, offering exciting venues for psychology scholars to contribute to the Carnegie perspective.

Performance Shortfall Scope and Emerging Economy enterprises’ Overseas R&D

ABSTRACT Based on the Behavioral Theory of the Firm and upper echelon theory, this study examines the impact of performance shortfall scope on emerging economy enterprises’ (EEEs) overseas research and development (R&D). First, this study suggests that the broader the performance shortfall scope is, the less likely EEEs are to implement overseas R&D. Moreover, this study suggests that top management team (TMT) tenure weakens the negative impact of performance shortfall scope on EEEs’ overseas R&D. Meanwhile, CEO duality enhances the above relationship. Based on the empirical data pertaining to Chinese listed manufacturing enterprises from 2003 to 2020, this study confirms the arguments put forward. This study is the first of its kind to examine the relationship between performance shortfall scope and EEEs’ overseas R&D.

Financial performance feedback, institutional ownership and green innovation: evidence from China

PurposeThe purpose of this study is to examine whether and how financial performance feedback influences green innovation performance by drawing on the behavioral theory of the firm (BTOF) and relying on motivation-based logic.Design/methodology/approachA total of 17,558 firm-year observations from 3,062 publicly traded firms in China are used as the research sample.FindingsThe results reveal that low-performing firms are less likely to conduct green innovation activities because managers burden pressure to meet short-term targets. This study further finds that these relations are moderated by institutional ownership.Originality/valueThis study contributes to the BTOF literature by linking performance feedback to green innovation activities. This study applies a motivation-based logic to relate performance below and above aspirations to green innovation activities. This study introduces institutional ownership as a boundary condition.

A tale of two distractions: How institutional forces influence R&D‐based problemistic search in transition economies

AbstractThe behavioral theory of the firm (BTOF) suggests that firms are motivated to increase R&D search in response to profitability shortfalls—that is, R&D‐based problemistic search. Although prior studies have provided considerable evidence for this influential explanation of R&D search, recent research shows that it is not the case in transition economies. Our study sheds light on this critical question of Why not for transition economy firms (TEFs), by identifying institutionally derived mechanisms that distract TEF decision makers' attention from R&D‐based problemistic search. Specifically, we examine the implications of institutional environments for goal definition and problem attribution—two critical yet underexplored components of problemistic search. Integrating the BTOF and institutional implications, we theorize how TEFs' R&D‐based problemistic search is distracted by government‐imposed goal definition and politically oriented problem attribution. Using panel data on Chinese listed firms, we find that R&D search in response to profitability shortfalls is negatively moderated by employment shortfalls (government‐imposed goal definition) and lack of political connections relative to peers (politically oriented problem attribution). Our study provides novel insights into TEFs' R&D‐based problemistic search by revealing two institutionally derived distractive mechanisms (i.e., boundary conditions). Moreover, this study extends the BTOF literature by exploring how decision makers' intrinsic attention allocation (among different goals and among different latent problems) is subject to extrinsic institutional environments.

Wrongdoing in Publicly Listed Family- and Nonfamily-Owned Firms: A Behavioral Perspective

We integrate research on family-owned firms (FOFs) and the Behavioral Theory of the Firm (BTOF) to study wrongdoing—a specific dimension of corporate social responsibility (CSR) associated with destructive risk—in family- versus nonfamily-owned firms (NFOFs). We argue that FOFs are likely to respond differently from NFOFs to risks because in addition to concern for economic costs and benefits, FOFs are uniquely concerned with the socioemotional wealth (SEW) accruing from the noneconomic costs and benefits of their actions. Furthermore, we argue that the differences in behavior are dependent upon whether the nature of risk associated with a behavior is destructive, as in the case of wrongdoing, versus productive, as in the case of other previously examined behaviors such as research and development [R&D] investment, diversification, or internationalization. Our analyses, based on 17,022 observations from a sample of 1,900 publicly traded U.S. firms from 1999 to 2016, provide robust empirical support for these predictions, showing that FOFs commit less wrongdoing than their nonfamily counterparts and respond to performance relative to aspirations regarding wrongdoing in a way that varies from their responses regarding other behaviors examined in prior studies. We thereby advance the literatures on BTOF and FOFs by explaining how family owners’ decisions change depending on the type of risk associated with their behavior— destructive versus productive, and by integrating the additional aspiration related to SEW into BTOF predictions to tell a more complete story of organizational wrongdoing from the BTOF perspective. By focusing on wrongdoing as a specific dimension of CSR, our findings also have implications for CSR research as they show that the relative importance of social responsibilities shifts according to the type of risks (and trade-offs) associated with those responsibilities.

Game of skill or game of luck? Distant search in response to performance feedback

Despite its strategic benefits, there is persistent heterogeneity across firms to what extent they engage in distant search activities. According to the default prediction of behavioral theory of the firm (BTF), poor past performance will increase a firm's propensity for distant search, whereas good performance will lead to a decrease. However, a contrasting view is taken within the emerging capability cue perspective, which predicts the opposite. To understand these conflicting views, we emphasize the key role of context that is formed by a firm's sectoral innovation pattern and shapes the dominant cognition of firms' managers. Building on this sectoral innovation perspective and Pavitt's seminal work (1984; 1995) we distinguish between a science-based innovation pattern (here, we focus on the semiconductor industry) and a specialized-supplier innovation pattern (we focus on the machinery industry). The key claim we make is that different sectoral innovation patterns shape other dominant managerial cognitions, leading to a different interpretation of past performance that influences the decision to increase or decrease distant search. Our paper contributes to an understanding of how the competing ideas on different ways in which firms respond to feedback, in view of distant search, can be reconciled. We also contribute to the literature on technological innovation by considering the role of managerial cognition and how differences therein can be associated with different firm choices on their distant search activities.