An inquiry into the process of adaptation in firms

Abstract

The third essay investigates what drives firms to make increases in innovation investments, which are risky, and long-term investments. Applications of behavioral theory of the firm show that shortfalls in expected performance drive innovation investments, indicating a problem driven motive to invest in innovation. This essay combines the behavioral theory insight of problem driven search, internal decision making processes, and the nature of innovation investments to show that increases in R&D intensity are a signal of low future performance indicating that managers make changes in R&D investments when they expect diminished future performance. Additionally, for firms performing well relative to their peers, changes in R&D are a stronger signal of low future performance. These findings are contrasted with the opposite arguments and findings suggested by existing literature utilizing the Resource-Based View of the firm.

This dissertation explores the process of adaptation which unfolds as managers face or anticipate performance shortfalls. It focuses on incorporating the understanding of behavioral processes at play within a firm to study factors that impact three strategic resources key to firms' ability to adapt, namely: organizational slack; financing; and innovation investments.

The first essay adds to the current behavioral theory explanations for accumulation and utilization of organizational slack to argue that the social context of different groups of influential external stakeholders impacts the manner in which these critical resources are accumulated and utilized. This essay shows that communitarian/embedded institutional owners restrict utilization of both absorbed and unabsorbed slack when performance declines, as well as restrict their accumulation when performance increases. In contrast, communitarian institutional owners strengthen utilization of potential slack when performance falls below aspiration, primarily by helping firms in utilizing relationship lending through banks. Furthermore, they also strengthen accumulation of potential slack when performance increases.

The second essay investigates the decision making processes at play when firms choose between different external financing options. This essay develops a conceptual framework that combines insights from the Behavioral Theory of the Firm and Transaction Cost Economics to argue that when performance falls below aspirations, firms are likely to prefer external equity financing to debt financing and, amongst debt, relational loan financing to market debt financing, controlling for internal equity reserves within the firm. As performance increases towards and around aspirations, such that satisficing tendencies set in, firms are more likely to issue debt instead of issuing equity. At higher levels of firm performance, while there is an overall tendency to issue external equity over debt, the specificity of investments influences financing choices such that greater the specificity, the greater the tendency to issue equity.