Constrained Growth: How Experience, Legitimacy, and Age Influence Risk Taking in Organizations

Abstract

Poor performance indicates that an organization's routines are not well suited for its environment and prompts decision makers to search for solutions. However, results conflict regarding how this search process influences risk taking in organizations. Managers in some organizations facing actual or expected performance shortfalls tend to take risks, while managers in other poorly performing organizations avoid risky changes. This conflict is interesting because some level of risk taking appears necessary for organizations to remain competitive, adapt to their environment, and improve performance. This study examines several mechanisms that moderate risk taking following performance shortfalls. First, I draw from organizational learning theories to argue that organizations with limited operating experience are less buffered from failure, and hence that poor performance constrains risk taking at these organizations. Second, I argue that organizations with poor legitimacy are also less buffered, and hence that performance shortfalls also lead to risk aversion at these organizations. Third, I draw from structural inertia theory to suggest that older organizations are less able to support risk taking following performance shortfalls. A test of these hypotheses on the capacity expansion behavior of U.S. railroad companies generally supports these hypotheses, although the effect of age is weaker. The findings contribute to theories of organizational learning and to several perspectives in organization theory more broadly.

How Third-Party CSR Evaluation Matters: Keeping Up with Rivals in CSR Performance Ratings of Korean Firms, 2011–2015

“…Scholars of the behavioral theory of firms have long argued that a firm's current performance below or above a specific reference point (i.e., the industry average) determines managers' perception of their firm's degree of failure or success [9][10][11][12][13][14][15]. In particular, perceptions of failure compared with industry rivals are likely to motivate managers to allocate more efforts and resources toward finding solutions that they believe can remedy the shortfalls in the firm's current performance vis-à-vis those of their rivals [9][10][11][12][13][14][15].…”

“…Combining insights from the research on ratings/rankings [1][2][3][4][5][6][7][8] and a behavioral theory of the firm [9][10][11][12][13][14][15], we hypothesize that rated firms are more likely to enhance their subsequent CSR behavior, and hence performance ratings, when their negative CSR rating gaps-CSR ratings below the industry average-are large rather than small, while positive CSR rating gaps-CSR ratings above the industry average-are unlikely to change their subsequent behavior. We reason that this relationship arises because firms tend to seek to eschew being seen as CSR laggards compared with their industry rivals, thereby putting more efforts toward elevating their CSR performance.…”

Exploration and exploitation within and across intra-organisational domains and their reactions to firm-level failure

“…Research has focused on various types of failure, such as technological failure (Schilling 1998), product failure (Cooper 1979), process failure (Shepherd, Covin, and Kuratko 2009), service failure (Zhu, Sivakumar, and Parasuraman 2004), market failure (Dundas and Richardson 1980), organisational failure (Baum and Mezias 1992) and strategic failure (Lant and Montgomery 1987). Failure is found to have impact on new business entrants (Holbrook et al 2000), firms' risk-taking (Audia and Greve 2006;Desai 2008), inter-organisational activities (Arino and de la Torre 1998) and organisational performance (Baum and Dahlin 2007;Kim and Miner 2007). Scholars have shown the importance of learning from firm-level failure, while acknowledging that it can be 'one of the most difficult things' that an organisation does because it requires 'focused effort and attention, and the willingness to make hard choices' (Wheelwright and Clark 1992).…”

Financial Reporting and the Accounting Expectations Gaap

“…An increasing count of research projects that deal with the basic factors and strategy to stakeholder participation in the decision-making processes of organizations has characterized the previous two decades according to Asher, Mahoney and Mahoney (2005). In fact, many studies (Harrison, Bosse and Phillips, 2010;Huang, Lenc and Szczesny, 2008;Desai, 2008) recommend the stakeholder theory usage in contemporary organization milieus. Clement (2005) contends that this increased recommendation could be attributable to the surging pressures on corporations to react to various interests of stakeholder groups.…”