Toward a Model of Risk in Declining Organizations: An Empirical Examination of Risk, Performance and Decline

Abstract

Scholars who study organizational decline have argued that declining organizations reduce or eliminate their riskier activities such as innovation. Further, they cite reduced risk-taking as a primary contributor to further decline. Scholars with an interest in risk per se come to the opposite conclusion: low performing firms often take more risks than other firms and such risks reduce subsequent performance. This study attempts to resolve these conflicting views by examining the risk of firms in decline. Our model, based on Cyert & March's (Cyert, R. M., J. G. March. 1963. A behavioral theory of the firm. Prentice-Hall, Englewood Cliffs, NJ.) behavioral theory of the firm, includes six basic variables: (1) performance, (2) slack, (3) aspirations, (4) expectations, (5) risk (income stream uncertainty), and (6) organization size as a measure of decline. The estimated model includes prior levels of risk and performance in the risk and performance equations respectively as controls. This study uses data on 344 low-performing firms in 19 manufacturing industries to estimate a time-series model that addresses both decline's influence on risk and risk's influence on performance while controlling for firm slack resources and industry factors. The results suggest (1) organizational decline and potential slack (debt/equity) positively influence risk whereas recoverable slack (SGA/Sales), and the difference between performance aspirations and expectations negatively influence risk; and (2) recoverable slack and risk negatively influence performance. We also examined the influences of performance and slack on organizational decline and found that performance associates negatively whereas recoverable and potential slack associate positively with decline. These results challenge the argument that declining firms reduce risk and so hurt their subsequent performance. Instead, the results suggest a cyclical process with positive feedback in which decline and the loss of certain slack resources increases risk which in turn reduces performance and results in further organizational shrinkage. Thus firms facing decline fall into a trap of taking unprofitable risks that ultimately exacerbates the decline. In addition, results relating slack to risk and performance exhibited inconsistent relations across the measures raising questions about the role slack resources play in risk and decline. Previous discussions of this slack implicitly assume all forms of slack have similar influences but our results demonstrate different forms of slack have very different effects.

Where to Seek Strategic Assets for Competitive Catch-up? A configurational study of emerging multinational enterprises expanding into foreign strategic factor markets

“…This buffering role facilitates the motivation of strategic-asset-seeking FDI because it enables the firm to search broadly and continuously (Cui et al, 2014), and therefore increases the expectation for success (Vroom, 1964). However, a lack of unabsorbed slack can also motivate searching behaviours, as firms may be driven by the hunger for resource security (Cyert & March, 1963;Lin, Cheng, & Liu, 2009;Wiseman & Bromiley, 1996). These different financial positions are likely to motivate firms to seek different types of assets.…”

UK evidence for the determinants of R&D intensity from a panel fsQCA

“…On the one hand, the result supports the problemistic search argument of behavioral firm theory that claims that R&D intensity increases as performance falls below aspirations. A firm whose performance falls below aspirations seeks new alternatives (e.g., Wiseman & Bromiley, 1996) and engages in more R&D (Chen & Miller, 2007). When aspirations are relative to industry levels, the same reasoning should apply.…”

“…When firms fall below their aspirations, more risk taking occurs (Bromiley, 1991;Lant & Montgomery, 1987;Miller & Chen, 2004;Washburn & Bromiley, 2012;Wiseman & Bromiley, 1996), and innovation search and R&D spending are examples of this risk taking. Some studies provide evidence to support the concept of risk taking through R&D spending in the presence of an attainment discrepancy (Antonelli, 1989;Chen & Miller, 2007;Greve, 1998).…”

“…By 2014, the indicator had still not returned to precrisis levels (OECD, 2014). Wiseman and Bromiley (1996) review opposing theoretical arguments concerning the relation between a firm's decline and risk taking and note that the literature is far from settling the debate. When looking specifically at the attitudes toward risk, Bowman (1982) and Bromiley (1991) find that troubled firms do indeed take on more risky activities.…”

The interactions between different types of financial and human resource slacks on firm performance: Evidence from a developing country

“…Researchers have examined the association between slack resource and risk taking (Wiseman & Bromiley, 1996), innovation (Greve, 2003;Nohria & Gulati, 1996), firm growth (Mishina et al, 2004), and performance (Bromiley, 1991;Love & Nohria, 2005;Miller & Leiblein, 1996;Tan & Peng, 2003;Wiseman & Bromiley, 1996). Tan and Peng (2003) suggest different impacts of absorbed and unabsorbed slack on firm performance.…”