attitudes toward risk and the risk return paradox prospect theory explanations this study attempted to explain bowman s risk return paradox in terms of recent research in behavioral decision theory and prospect theory the research emphasized the role of reference or target

business risk and return a test of simultaneous relationships bowman 1980 found an unexpected and paradoxical negative relationship between risk and return in many firms and for about a decade various researchers have attempted to explain the paradox this article summarizes some of those explanations and shows that industry conditions and business strategies are likely to influence both risk and return the relationships are depicted in a simultaneous model where business return risk and debt are endogenously determined the model is tested with 132 nondiversified firms in 8 disparate industries ols estimates of the parameters of the model show the risk return relationship to be significantly negative as many past researchers have found however 3sls estimates of the parameters of the simultaneous model reveal no significant relationship between risk and return the tentative conclusion is that many of the studies in the line of research concerned with bowman s 1980 paradox may have used an improperly specified model and that when a more realistic sim

business group affiliation and firm search behavior in india responsiveness and focus of attention this paper investigates the effects of organizational form on problemistic search we contrast how indian firms affiliated with business groups and unaffiliated firms evaluate performance and react by adjusting their internal technology search and external market search we propose that compared with unaffiliated firms business group affiliated bg affiliated firms are more externally oriented in setting aspiration levels and more likely to respond to low performance in the market domain we find support for an external orientation of bg affiliated firms and find that group affiliation determines the responsiveness to performance feedback in different search domains the findings suggest a need to add considerations of organizational form and governance to the theory of organizational search

variable risk preferences in new firm growth and survival we outline and test a decision making theory of new venture growth and survival building upon research in entrepreneurship and decision making under risk we hypothesize that entrepreneurs attention to survival and aspiration reference points changes based on venture age experience based learning size differences in decision complexity and performance decision domain examining a panel of 14 760 new ventures in the professional services sector our findings show how risk preferences change as a venture ages and increases in size this approach offers a more nuanced view of decision making under risk and provides a theoretical explanation for the common patterns of new ventures probability of exit and growth diminishing with age and size

measuring organizational downside risk despite widespread incorporation of risk measures in strategy research there is little consensus regarding the meaning and measurement of risk in contrast to the variability measures widely used in strategy studies this paper draws from behavioral decision theory finance and management theory to present an alternative perspective on organizational risk downside risk the paper explains three categories of organizational downside risk measures based on the concept of lower partial moments the latter sections of the paper present considerations involved in specifying operational measures of downside risk and an empirical comparison of alternative downside risk measures

prospect theory and the risk return association an empirical examination in 85 industries a new sample of 85 industries about 3 300 firms defined in terms of homogenous products provides strong evidence that prospect theory can explain the tradeoff between two of the most researched parameters in evaluating organizations namely risk and return in particular organizations below their target level are found to be risk takers hl while organizations above their target level are risk averters h2 moreover the below target tradeofl was generally steeper than the above target with a median below to above slope ratio of about 3 l h3 risk and return are probably the two single parameters most researched by the various and related disciplines of economics finance and management although each one of them has looked at these two parameters from different aspects and for different purposes they have provided a wide understanding of these two factors in the contest of the theory of the firm the purpose of this study is to look closely at the relationship between these two important parameters in order to understand firm s competitive behavior using the recent development in behavioral decision theory namely prospect theory kahneman and tversky 1979 although march 1988 has criticized the discipline of management for its later adaptation in considering risk elements for evaluating organization performance and decision making processes recent studies e g bettis 1981 rumelt 1974 singh 1986 jemison 1987 and baird and thomas 1986 have paid considerable attention to risk aspects in evaluating the performance of firms in general these studies have concluded that the characteristics of the firms environment strategy and implementation processes have significant and important influence on the firm s risk level and its associated rate of return bowman 1980 has looked closely at 85 u s industries and explored the

firm capabilities technological dynamism and the internationalisation of innovation a behavioural approach we develop a behavioural framework of bounded rational decision making under uncertainty to analyse the role of technological dynamism in the firm s environment for its decision to internationalise innovation applying prospect theory we argue that technological uncertainty in the firm s environment affects its risk preferences differently depending on its technological capabilities a key prediction is that firms with low capabilities will internationalise innovation when faced by technological uncertainty while firms with high capabilities will concentrate their innovation at the home base we also argue that our behavioural approach based on prospect theory is not a stand alone programme but benefits from the integration with traditional concepts in ib in particular we make a case that organisational measures fostering absorptive capacity such as intensive personnel exchange between headquarters and subsidiaries can help to attenuate the high capability firms tendency to concentrate innovation at the home base when faced by high uncertainty we corroborate the predictions of our framework based on data from the german part of the community innovation survey

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

moral hazard economic meaning of the conditions justifying the first order approach abstract it is shown that the condition justifying the use of the agent s first order condition to describe his optimal action in a principal agent situation with pure moral hazard is related to but not the same as diminishing returns to effort examples are provided to illustrate the joint implications for the production function the nature of the underlying uncertainty and the disutility of effort

fixed versus variable reference points in the risk return relationship abstract researchers using prospect theory in explaining bowman s risk return paradox have typically assumed a single fixed reference point normally the industry median in defining two decision contexts gain and loss our findings suggest this reference point is elevated above industry median performance and varies over time and across industries independent of industry performance consistent with the prospect theory firms above this reference point were risk averse and those below it were risk seeking we found no evidence of a second survival reference point for firms in trouble

performance feedback and firm risk taking the moderating effects of ceo and outside director stock options we contribute to the behavioral theory of the firm and the behavioral agency model by developing a theoretical framework that predicts the differential interaction effects of performance feedback and values of stock option grants of multiple agents on firm risk taking we explain how chief executive officers ceos versus outside directors awarded with stock option grants perceive negative or positive deviations from prior performance we argue that in a negative attainment discrepancy context high values of option grants will increase the risk aversion of ceos who already bear excessive employment and compensation risks resulting in less risk taking however it will enhance the risk taking propensity of influential outside directors who increase monitoring and support for risky projects because their risk preferences are better aligned with those of shareholders in a positive attainment discrepancy context high values of option grants will amplify risk aversion in both ceos and outside directors who

organizational structure and performance feedback centralization aspirations and termination decisions this study examines the effects of organizational structure and performance feedback on termination decisions in particular product phaseout using quarterly product level data on the major mobile handset manufacturers for the period 2004 2009 we analyze how product level feedback affects product phaseout and how these decisions are conditioned by organizational structure the extent to which decision making is centralized we argue that such structure affects termination in two ways directly through coordination and indirectly by shaping the interpretation of performance feedback our baseline models indicate that as performance increases above aspirations the rate of phaseout decreases we find that as performance declines below aspirations the rate of phaseout decreases but then increases when the product falls below a certain sales threshold we also find evidence that centralization amplifies the feedback effect above aspirations but attenuates it below aspirations this study links two pillars of the carnegie school aspiration levels and hierarchy to explain the complexity of phaseout following perceived success or failure we thereby augment the growing scholarship on performance feedback by considering some important conditional effects imposed by a centralized structure our focus on centralization expands the scope of theory concerning organization design by linking structure and cognition to explain firm behavior especially termination decisions

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

variable risk preferences and adaptive aspirations abstract observations of human decision making indicate that risk preferences depend on the values of possible outcomes relative to levels of aspiration a model of such variable risk preference is specified it suggests that some risk averse behavior may result from a human tendency to focus on targets and from the adaptation of those targets to experience rather than from a fixed trait of risk aversion in addition the model shows how risk preferences varying around adaptive aspirations produce both a greater long run likelihood of survival and a higher average return for survivors than do fixed risk preferences

antecedents of convergence and divergence in strategic positioning the effects of performance and aspiration on the direction of strategic change this paper investigates drivers of convergence and divergence in strategic positioning in terms of resource allocation decisions the study based on the behavioral theory of the firm suggests two unexplored kinked curve relationships between performance gaps and strategic convergence divergence first the study suggests a negative relationship between a focal firm s performance relative to aspiration levels and strategic convergence divergence where the slope is steeper when performance is above the aspiration level second it suggests a positive relationship between a target firm s performance relative to a focal firm s performance and strategic convergence divergence where the slope is steeper when a target firm s performance is below a focal firm s performance empirical analysis of dyad level data in the u s food processing industry reveals that the direction of a firm s strategic change is shaped by its aspiration level its performance level and the performance gap between it and the firm it selects as a model this study contributes to the current literature by offering preliminary indications of when and how a firm moves closer to or further away from other competing firms in its strategic position

determinants of firms backward and forward looking r d search behavior this study develops and operationalizes a behavioral forward looking search model by incorporating prospect theory organizational risk literature and the logic of the behavioral theory of the firm with recognition of the bounded rationality of decision makers and the goal directed rule based nature of organizations this model suggests that a comparison between firms performance expectation and performance target translates the cognitive representation of the firms future into their subsequent actions by examining the research and development r d expenditures of u s manufacturing firms from 1980 to 2001 this study explores how performance aspirations expectations and slack affect decision making about firms r d search investments the findings show that both performance feedback and performance prospect are important determinants of firms search behavior after controlling for firm industry and time effects in addition backward and forward looking determinants have interactive effects on search behavior firms problem driven search activity further increases when firms feel unlikely to achieve the performance target for another year in contrast search intensity is reduced when firms expect to improve their performance from an underperforming situation to an outperforming situation the findings suggest that future research on performance feedback and experiential learning should also consider the effect of forward looking prospects on firm behavior

variable organizational risk preferences tests of the march shapira model march and shapira s 1987 1992 model of managers risk preferences allows for shifts in attention between survival and aspiration levels our study provides initial empirical tests of their model

experiential learning competitive selection and downside risk a new perspective on managerial risk taking it is part of managerial wisdom that managers need to take risks in order to succeed this is in stark contrast to the prominent agent based theories of experiential learning and competitive selection that are known to be biased against risky alternatives in the long run how can the positive managerial view on risk taking prevail given these results qualitative surveys of managers suggest risks to be acceptable if their outcome distribution meets certain criteria we argue in this paper that these criteria are widely congruent with low downside risk using a novel simulation design we analyze the effects of experiential learning and competitive selection on downside risk preferences in an ecology of agents in the long run experiential learning implies weak downside risk seeking whereas competitive selection leads to strong downside risk aversion furthermore competitive selection leads to the prevalence of outcome distributions with low downside risk in an ecology even if they have a significantly higher level of total risk than comparable distributions with more downside risk we draw implications for empirical studies on managerial behavior the online appendix is available at https doi org 10 1287 orsc 2017 1149

kinked utility and the demand for human wealth and liability insurance the paper advances the hypothesis that the gross wealth von neumann morgenstern utility function is characterized by a horizontal branch for wealth levels below the socially guaranteed minimum wealth and analyses the implications of this property for human wealth and liability insurance it turns out that the attractiveness of these kinds of insurance might even for risk averse people be too low to satisfy the premium requirements of private insurance companies

a rationalization of bonuses penalties and kinked payment functions within an agency model abstract the optimal payment schedule of the simplest principal agent problem can be continuous smooth or kinked or semicontinuous depending on the specifications of objective functions of the principal and or of the agent using the nonsmooth mathematical analysis this article determines a mapping from classes of objective functions into classes of optimal payment functions examples provide illustrations

a behavioral theory of market expansion based on the opportunity prospects rule what explains organizational search and choice when multiple opportunities are available to the decision makers drawing on the behavioral view of the firm and on the attention based view this study proposes a theoretical model centered on the opportunity prospects rule to explain market expansion defined as the extent how many and the selection which of multiple available opportunities that are actually pursued by competing firms we test our model using longitudinal fine grained data on commercial banks undertaking more than 1 300 opportunity choices the findings show that firms do use the opportunity prospects rule when exercising market expansion choices and that slack and performance feedback moderate the effects of opportunity prospects this paper contributes to organizational decision making research and to the behavioral view of the firm by showing the importance of considering an opportunity driven approach by demonstrating the relevance of simplifying rules to explain the search for the consequences of alternatives by extending recent efforts to provide a more forward looking perspective to model organization behavior and by showing when slack and performance feedback moderate the effects on market expansion of the opportunity prospects rule

testing a causal model of corporate risk taking and performance the determinants of organizational risk taking and its impact on economic performance are critical issues in strategic management using a model that included risk performance performance expecta

new directions in the economic theory of agency an accessible survey of existing results in the theory of agency is provided a general one period single agent model is presented first and the restrictions required to obtain predictions are explained environments having more than one agent and or multiple periods are considered subsequently the central conclusion is that the theory of agency as currently formulated has little operational content the new directions suggested are among those that are likely to yield more empirically relevant propositions directions nouvelles dans la theorie economique de l agence l auteur presente un survol relativement simple des principaux resultats des analyses de la theorie economique de l agence on presente d abord un modele general dans le cas d un agent et d une periode ainsi que les restrictions requises pour obtenir des previsions sans ambiguite on examine ensuite les cas oiu il y a plus d un agent et ou plus qu une periode ce qui ressort de cette analyse fondamentalement c est que la theorie de l agence telle qu elle est formulee pour le moment a un contenu operationnel limite les directions nouvelles suggerees dans le memoire sont susceptibles d engendrer un plus grand nombre de propositions pertinentes et operationnelles