Performance, Aspirations, and Market Versus Nonmarket Investment

Research from the behavioral theory of the firm argues that declining performance below aspiration levels drives firms to engage in problemistic search that results in strategic actions designed to overcome performance shortfalls. This research has considered only strategic actions taken in the firm's market environment though, such as investments in R&D. Firms operate and take strategic actions in both the market and nonmarket environment, the latter including firm interactions with the government. The research presented here argues that for reasons of risk aversion, firms facing declining performance below aspiration levels are likely to engage in strategic actions in the nonmarket environment immediately following a performance shortfall. In contrast, risk-taking preferences are argued to motivate firms to take strategic actions in the market environment in the future. We find support for these arguments utilizing 27 years of data from large U.S. firms.