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Attitudes toward Risk and the Risk-Return Paradox: Prospect Theory Explanations
... In fact, businesses have dissimilar behavioral response to different circumstances, environment and markets challenges. Often, the response to these market dynamics is influenced by firm performance (Fiegenbaum, 1990;Fiegenbaum and Thomas, 1988). If firm performance is above the preconceived target (e.g. ...
... The empirical studies based on the PT argue that firm risk-taking is based on their expectations or the level of achievement of predefined performance benchmark (Becerra and Markarian, 2013;Cheng, 2010;Chou et al., 2009;Fiegenbaum and Thomas, 1988;Gooding et al., 1996;Gupta and Guha, 2019;Gupta and Pathak, 2018;Holder et al., 2016;Jegers, 1991;Kliger and Tsur, 2011;Lee, 1997;Marzo, 2010). If a firm is well performing and consistently meeting its performance target, it will not be tempted to take higher risk to increase its returns. ...
... Such as, in case of firm-specific risk, it shows risk-averse behavior. However, the riskseeking behavior of an under-performing firm is only established in case of systematic risk (Fiegenbaum and Thomas, 1988;Gooding et al., 1996;Gupta and Pathak, 2018;Holder et al., 2016;Jegers, 1991). It shows that below aspiration performances have compelled or motivated those under-performing firms to take extra strives to indulge in market innovation and experimentation, which is often considered as high-cost and risky activities Shapira, 1987, 1992). ...
Purpose
This study aims to extend Bowman's risk–return paradox to Asian emerging markets and explain its causes under the prospect theory.
Design/methodology/approach
The study is conducted on a cross-sectional sample of 4,609 firms across nine Asian emerging countries. The two stage least squares (2SLS) estimation technique is used to evaluate the three objectives of the study, i.e. Bowman's risk–return paradox, significance of firm-specific risk and prospect theory explanation of Bowman's paradox.
Findings
The authors challenge the two basic financial economics arguments that higher risk is rewarded with higher return, and firm-specific risk is diversifiable. The empirical findings confirm the negative impact of firm-specific and systematic risk on firm return, thus, corroborates the Bowman's explanation of risk–return trade-off. However, the authors did not find empirical evidence to support prospect theory's explanations of Bowman’s paradox in Asian emerging markets.
Originality/value
A holistic approach is adopted to analyze the various aspects of Bowman's paradox and its causes for the same time period, variables and sample. The authors also rectified several methodological limitations observed in previous studies, i.e. the use of same proxies for firm return and risk, endogeneity and survivorship issues. Furthermore, the findings of this study will enable managers to formulate critical viewpoint on firm-specific risk and systematic risk and take informed strategic decisions regarding optimum utilization of their firm's key resources in Asian emerging markets.
... Drawing on arguments from the strategic competitive dynamics literature (Ito & Pucik, 1993;Lee, Beamish, Lee, & Park, 2009;Lee, Oh, & Lee, 2017;Smith, 2014) and prospect theory (Fiegenbaum, 1990;Fiegenbaum & Thomas, 1988;Jimenez & Delgado, 2012;Kahneman & Tversky, 1979), we argue that a firm's domestic market position may play a critical role in the internationalization of dominated firms in emerging economies by increasing their risk-taking orientation as a result of their dissatisfaction with their position in the domestic market. ...
... This logic, in fact, aligns with prospect theory (Fiegenbaum, 1990;Fiegenbaum & Thomas, 1988;Jiménez & Delgado, 2012;Kahneman & Tversky, 1979), which argues that when firms enjoy high returns, they are less likely to take risks. In particular, a firm with above average returns in its industry tend to show risk-averse behavior, only taking increased levels of risk when the expected return on the investment is attractive enough (Jiménez & Delgado, 2012). ...
... We build on and combine the postulates from the strategic competitive dynamics literature (Ito & Pucik, 1993;Lee et al., 2009Lee et al., , 2017Smith, 2014) and prospect theory (Fiegenbaum, 1990;Fiegenbaum & Thomas, 1988;Jiménez & Delgado, 2012;Kahneman & Tversky, 1979) to propose that the internationalization of firms from emerging economies might be significantly determined by their domestic market position in such a way that dominated firms are more likely to succeed when investing in less-developed markets, thus extending their foreign subsidiary exit time. The reason is that although firms from this type of economy may find their experience in their home countries useful to adapt to similar markets with underdeveloped institutions compared to competitors from developed countries Cuervo-Cazurra & Genc, 2008;Khanna & Palepu, 1997), the ability to effectively adjust as required by the host market is shaped by the firm's competitive dynamics in its home country. ...
The literature has tended to overlook the great divergence in the competitive dynamics of firms in emerging economies. Drawing on the strategic competitive dynamics literature and prospect theory, this article aims to deepen our understanding of the competitive dynamics among firms in emerging economies and how the dissatisfaction of dominated firms with their domestic position affect foreign subsidiary exit time. Using hazard models with an accelerated failure time (AFT) specification, we investigate the impact of a firm’s domestic market position on subsidiary exit time using a longitudinal sample of 6,651 subsidiary-year observations and 735 subsidiary exits of 296 South Korean parent firms with international operations in 64 countries over a 27-year span (1990–2016). The empirical results suggest that the domestic market position affects the risk-taking orientation of dominated firms and plays a critical role in the internationalization of firms in emerging economies. Specifically, dominated firms, compared to dominant firms, have some advantages when investing abroad, notably in less-developed countries.
... Different studies have used the sociodemographic factors of the farmer as direct determinants of their decision-making behaviour. These variables are age of the farmer [16][17][18][19][20]; education level of the farmer [31,35]; farmers' experience [36,37]; farm size include the studies of [38][39][40]; off-farm income [36,37,41]. These studies have found a significant impact on the probability of farmers' choices. ...
... Different studies have used the sociodemographic factors of the farmer as direct determinants of their decision-making behaviour. These variables are age of the farmer [16][17][18][19][20]; education level of the farmer [31,35]; farmers' experience [36,37]; farm size include the studies of [38][39][40]; off-farm income [36,37,41]. These studies have found a significant impact on the probability of farmers' choices. ...
... Ref. [34] also has a positive impact on farmers' risk attitudes [35]. Farm size also has a significant Agriculture 2022, 12, 412 9 of 24 impact on farmers' risk attitudes [36]. Ref. [37] examined the age of farmers has a positive impact on their risk perception. ...
Agriculture is a risky business, and risk persists in all management decisions taken by a farmer at the farm level. Disrupting agricultural business severely affects the livelihood of individual farmers and negatively affects the country’s economy. To cope with risks, farmers’ tend to mitigate the harsh impact of risks by adopting risk management strategies. Such an adoption decision is affected by several factors, most importantly, the psychological factors, i.e., risk perception and risk attitude of the farmer. Therefore, the purpose of the study is to understand farmers’ risk perception and risk attitude that affect their behaviour in making decisions at the farm level in a risky prospect. The association is investigated by employing chi-squared tests and Cramér’s V. The indirect impact of socioeconomic characteristics of the farmer via their psychological factors is conducted using structural equation model (SEM) path analysis. Their direct impact, together with psychological factors, are examined using the probit model. The two models are compared statistically for better performance and interpretations of the results. From the results, we found that risk perception and risk attitude are the key driving forces of farmers’ decisions during uncertainty which induce them to adopt risk management strategies. Other key variables and their quadratic functions that significantly affect farmers’ behaviour include education level, farming experience, off-farm income, and farm size. Thus, it is vital to consider these factors while assessing farmers’ behaviour in a risky prospect.
... For example, according to behavioural theory, greater resource slack can provide opportunities for riskier decisions (e.g., Moses, 1992;Singh, 1986). Prospect theory (Kahneman and Tversky, 1979) suggests that risk-taking behaviours are more likely to occur in the absence of slack (Fiegenbaum and Thomas, 1988). The disparate findings have given rise to a nomenclature that accounts for a specific property of a resource: the degree of absorption, i.e., the degree to which slack resources are tied (or not) to specific firm operations (Symeou et al., 2019). ...
... On the other hand, in underperforming projects, unabsorbed slack allows project heads some wiggle room to find solutions to performance problems (Fiegenbaum and Thomas, 1988;Rahimi et al., 2018). Yang et al. (2022) show that when the project moves to a later stage in the stage-gate process, managers with a continuous perception of performance threats are likely to increase their efforts to mitigate such threats and close the performance gap. ...
A project may be conceived as a coalition of absorbed and unabsorbed resources that are allocated by the organisation. As such, a project may be subject to constraints in terms of certain resources combined with excesses (i.e., resource slack) in terms of others. This paper builds on the behavioural theory and the prospect theory to understand the role of resource slack in projects by exploring: 1) how distinct bundles of absorbed and unabsorbed slack influence project managers' risk perceptions; 2) how the impact of slack on risk perceptions differs according to ongoing project performance. Hypotheses are tested by regression analysis in a sample of 106 project managers. The results show complex effects of project slack on project managers' risk perceptions.
... investigates the consistency of results with the prospect theory. In the same way, and with a behavioural finance framework, Johnson (1994) analyzes risk decision-making in banks using Fiegenbaum and Thomas' (1988) hypothesis and Fishburn's (1977) measure of risk defined as dispersion around the average result. These two authors support the contribution of prospect theory in explaining risk behaviour in conventional and Islamic banks. ...
... Based on the suggestions of the prospect theory and the findings of Fiegenbaum and Thomas (1988), we formulate our major formal hypotheses as follows: ...
This article investigates the impact of bank size and business model on bank risk‐taking within the framework of the prospect theory. To fulfil this objective, we use the adjusted thermal optimal path model. The results suggest that conventional banks adopt the same risk‐taking behaviour for performance measures, regardless of their size. However, the size mainly influences the attitudes of managers towards Islamic banks. On the other hand, small Islamic banks, whether under‐ or over‐performing, take excessive risks. This behaviour is mainly explained by loss aversion. However, large Islamic banks that situated above the target are risk‐averse, since they adopt defensive behaviour. The results reveal that for risk measures and for both small and large banks, a bank's business model does not affect managers' attitude to risk. Therefore, small (large) banks adopt excessive risk‐taking (risk‐averse) behaviour and an offensive (defensive) strategy. The study has important implications for GCC banking regulators, supervisors, and market participants. Thus, our findings imply that understanding the impact of the bank size and business model on the risk‐taking behaviour of Islamic and conventional banks can help them reduce their risk and mitigate moral hazard and regulatory arbitrage behaviour.
... Whilst PT's inception was tied to the process of decision-making at the human level, it has now found widespread use in corporate settings (e.g., Chang & Thomas, 1989;Fiegenbaum, 1990;Fiegenbaum & Thomas, 1988;Gooding et al., 1996;Johnson, 1994;Lee, 1997;Lehner, 2000;Miller & Bromiley, 1990). Keeping in view the importance of PT, we decided to study this filed in context of dividends growth. ...
... So far as we are aware, there has been no prior research on the relationship between risk and dividend payments under PT; hence, our research is the first in this field. However, if we look at the previous work related to risk-returns association under PT, we can observe that past studies have adopted a standard reference point at the sectoral level, which is often quantified by the average or median profits across all industries (Fiegenbaum, 1990;Fiegenbaum & Thomas, 1988;Johnson, 1994;Kliger & Tsur, 2011;Miller & Bromiley, 1990). Based on that assumption this research paper also uses industry the mean value of dividend changes as the reference point. ...
In this research paper we used prospect theory (PT) to analysis the association between risk and dividend changes. We used global index (24 countries index data) data from 2000 to 2021. To improve PT, we suggest a novel alternative to the traditional reference point. Reference was established by tracking dividend growth or declines across sectors. The assumption is that before the end of the period, all the firms’ industrial dividend changes have to be known. In this research we calculated our reference point separately for individual years because the mean of industry dividend changes in the previous year. We utilised GMM estimation for the robustness test and split our sample up by business size, and we used 3 empirical methods (pooled regression, industry regression, and cross-sectional regressions analysis). Using the aforementioned empirical methods, we determined that dividend fluctuations are significantly correlated with a decrease in a company's risk. These findings imply that companies whose dividend changes are more than (less than) their benchmark will take on more (less) risk.
... Representative work Buckley and Casson (1976), Hennart (1982), Williamson (1975Williamson ( , 1985 Kahneman and Tversky (1979), Tversky and Kahneman (1981), Fiegenbaum and Thomas (1988) We propose that theoretically misaligned governance modes are associated with significant risk and uncertainty. Building on the TCE's assumption that the foreign governance mode should economize on transaction costs in order to mitigate potential hazards and opportunistic behavior (e.g., Hennart, 1982), we conceptualize misaligned governance modes as the result of risk-seeking behavior in which decision-makers opt for nontraditional governance modes on the expense of ensuring protection for foreign-asset-specific investments. ...
... Firms experiencing performance below expectations are motivated to reconfigure their resources and activities to increase effectiveness (Moliterno & Wiersema, 2007). Such failures to attain aspiration levels often increase firms' risk profiles (Bromiley, 1991;Kahneman & Tversky, 1979), as decision-makers seek riskier solutions to reduce the gap between current performance and their aspiration levels (Fiegenbaum & Thomas, 1988;Greve, 1998). ...
Research Summary
Transaction cost economics (TCE) holds that multinational corporations (MNCs) should select governance modes based on associated transactional hazards. However, MNCs often adopt theoretically misaligned governance modes. Applying a prospect theory (PT) perspective, we use the context of business‐process offshoring to explore why firms choose misaligned governance modes. We argue that theoretically misaligned governance modes are regarded as riskier than aligned governance modes, and we suggest that prior experiences of failure in an international context—especially in business functions that are relevant for the internationalization of a firm—prompt decision‐makers to choose theoretically misaligned governance modes. We enhance discussions on governance‐mode decisions with important behavioral perspectives on how such decisions materialize.
Managerial Summary
Experience with underperforming investments provides decision‐makers with an important motivation to search for riskier, nontraditional solutions, such as governance modes that do not necessarily comply with conventional logics. We show that such decisions, which have traditionally been conceived as managerial mistakes, are driven by behavioral insights found in the fields of human and organizational psychology. While we explore this idea in the context of international governance‐mode decisions, we believe such a behavioral perspective on international decision‐making is generalizable to other relevant contexts.
... FFR is defined as uncertainty linked with the expected financial performance outcome and cash flow that may influence future investment decisions, such as investment into the firm's green initiatives (Habib and Hasan, 2017;Tariq et al., 2019a). In line with this, researchers argue that FFR is most relevant to the general management regarding their interpretation of the adequate and stable profit level (Fiegenbaum and Thomas, 1988;Lin et al., 2019), to stakeholders concerning their corporate risk understanding (Miller and Bromiley, 1990) and to pursue organization strategies effectively, such as attracting talented employees (Tariq et al., 2019a;Lin et al., 2019). Thus, the first purpose of this article is to assess the linkages between GPRIP and FFR, contributing to the debate on "does it pay to be green?" ...
... SROA is the net income standard deviation divided by the total asset during the previous three years (Habib and Hasan, 2017). This research utilized SROA measures, regarded as most relevant to the general manager in their interpretation of the adequate and stable profit required to pursue different strategies and to meet future cash flow obligations (Fiegenbaum and Thomas, 1988). Researchers argue that higher SROA reflects higher variations in earnings, and it is likely to be the result of management's unsustainable policies (Tariq et al., 2019b). ...
Purpose
Over the last two decades, corporations have increasingly adopted green innovation to lessen the unsuitable impact on the environment and gain competitive advantage at the same time. However, researchers have paid more attention to green product innovation and the firm's financial risk (FFR) relationship than green process innovation. Such neglect of green process innovation has failed to produce an elusive understanding of green process innovation and FFR relationship, and this relationship is necessary to understand for the ongoing debate on “does it pay to be green?” Thus, the purpose of this research is to investigate the relationship between green process innovation performance (GPRIP) and FFR, and it also examines the moderating role of slack resources and competitive intensity in facilitating this relationship.
Design/methodology/approach
The authors collected 202 publicly listed Thai manufacturing firms' data using questionnaire survey and firms' financial statements, and this research employed hierarchical moderating regression analyses to test hypotheses.
Findings
Results demonstrate that GPRIP negatively influences the FFR. Competitive intensity reinforces the negative relationship between GPRIP and FFR, whereas organizational slack has an unfavorable moderating effect, i.e. firms with ample organizational slack are less likely to reduce their financial risk from higher GPRIP.
Originality/value
The research model contributes to an ongoing debate on “does it pay to be green?” by providing a thorough understanding of GPRIP and FFR relationship, as to the authors' best knowledge, no work to date has examined this relationship. This research also sets out the boundary conditions of the GRPIP and FFR relationship and highlights the critical role of firm-specific condition, i.e. slack resource and market condition, i.e. competitive intensity to reap higher financial benefits from GPRIP.
... This is in line with Hambrick andAbrahamson's (1995, p. 1429) argument that managers can be: "literally constrained by external forces, […] so only a narrow range of options holds any plausibility in the eyes of powerful parties". Finally, we argue that the behavioral perspective in managerial decisionmaking (Bowman 1980;Fiegenbaum and Thomas 1988;Singh 1986;Wiseman and Gomez-Mejia 1998) and our approach converge in the understanding that dissimilarities regarding risk preferences between insiders (managers) and outsiders (owners and external financiers) arise from heterogeneity in how one frames the problems (Wiseman and Gomez-Mejia 1998). Still, we bring two important points into the foreground of the discussion. ...
... This study also opens several avenues for researching the behavioral aspects behind the communication penalty. For instance, by delving into the fundamental drivers that make people in different circumstances to see, or frame, a problem differently (see also , Bowman 1980;Fiegenbaum and Thomas 1988;Singh 1986;Wiseman and Gomez-Mejia 1998). Thus, all in all, the crux of the issue rests on the capacity of firms to use their "uncommon sense" (Drucker 1994(Drucker , 2014 to create a future "as they wish it to be" (Kirzner 1985, p. 63). ...
This study uses a multidisciplinary lens to investigate new determinants of the puzzling phenomenon of zero leverage, where firms contain only equity in their capital structure. We draw on insights from entrepreneurship and creativity theories, alongside traditional corporate governance (CG) literature, to reframe the construct of risk-taking and develop the novel construct of rule-taking, which entails compliance with powerful outside parties and current best practices of CG. We hypothesize that risk-taking is associated with a wider wedge of information and costs regarding internal and external financing, leading to a greater likelihood of debt eschewing. Conversely, rule-taking is hypothesized to reduce the range of acceptable choices in the firm, which makes the adoption of the “aberrant” behavior of zero-leverage less likely. Using 9222 firm-observations from 37 countries, the results corroborate our hypotheses, showing a positive (negative) association between risk-taking (rule-taking) and zero leverage. The results are robust to several alternative specifications and matching samples. Our study offers insights to policymakers and investors to clarify the antecedents of zero-leverage behavior as a strategy to deal with the information gap between insiders and outsiders. Our perspective underscores the existence of an inherent communication penalty between an insider and an outsider when the former is performing actions that are non-typical under the oversight of the latter. Thus, by deepening understanding on risk-taking and rule-taking, we provide a more nuanced view of how firms can optimize capital and CG structures, with special implications for the adoption of well-tailored bundles of CG mechanisms under different circumstances.
... Many research works have discovered this phenomenon, for example, Fiegenbaum and Thomas [36] pointed out that "For returns below target, a large majority of individuals appear to be risk seeking; for returns above target, a large majority appear to be risk averse." ; and Odean [37] showed that individual investors are reluctant to sell stocks with short-term prior losses, preferring to sell prior short-term winner stocks. ...
In this paper, a level set analysis is proposed which aims to analyze the S&P 500 return with a certain magnitude. It is found that the process of large jumps/drops of return tend to have negative serial correlation, and volatility clustering phenomenon can be easily seen. Then, a nonparametric analysis is performed and new patterns are discovered. An ARCH model is constructed based on the patterns we discovered and it is capable of manifesting the volatility skew in option pricing. A comparison of our model with the GARCH(1,1) model is carried out. The explanation of the validity on our model through prospect theory is provided, and, as a novelty, we linked the volatility skew phenomenon to the prospect theory in behavioral finance.
... Several studies have refuted the thesis that stock returns have a normal distribution as assumed in the efficient market hypothesis. In fact, many studies (Bowman, 1980;Fiegenbaum and Thomas, 1988;Andersen et al., 2007;Chou et al., 2009), prove that the most basic assumption of the theory expressed as " high-risk high return" is violated, in other words, there is a negative relationship between risk and return. ...
This study aims to create a risk measure based on systematic investor behavior. For this purpose, as an alternative to the classical risk measure, volatility, the empirical validity of the downside risk measure, which includes skewness and kurtosis values, was tested. Standard deviation, skewness, and kurtosis differences are used to explain the returns of portfolios created using data from stocks listed on the New York Stock Exchange (NYSE) between 1982 and 2020 depending on different risk concepts. Risk definitions are based on the previous period's skewness and kurtosis coefficients of stock returns. Based on the determined measures, stocks are classified according to their risk level. The relationship between returns and risk measures was examined by regression analysis. According to the results, negative skewness did not provide a higher return than positive skewness. In addition, a higher kurtosis value did not provide higher returns than a lower kurtosis value. As a result, the concept of risk, which represents the loss of the investor, emerges as a result of irrational systematic investor behavior and can be modeled with the skewness coefficient of the return distribution. However, taking a risk in this sense does not promise a reward.
... Similar to the social comparison process, that is, individuals usually compare themselves with other people who are similar in significant attributes as a reference group (Festinger, 1954;Miller, 1982;Baird et al., 2015;Thibaut, 2017), managers will set other organizations that they think are similar to their organizations as reference groups form reference groups (Lant & Baum, 1995;Porac, Thomas, Baden-Fuller, 1989;Kim et al., 2015;Tyler & Caner, 2016;Marquis & Tilcsik, 2016;Humphreys & Carpenter, 2018). Managers typically have greater awareness of the behavior exhibited by these reference groups and may even be inclined to imitate them (Baum & Haveman, 1997;Fiegenbaum & Thomas, 1988;Kim et al., 2015). ...
This study aims to investigate the potential impact of peer firms on the quality of CSR reports produced by the focal firm. By combining insights from the behavioral theory of the firm and existing literature on aspirations, this paper proposes that the aspiration levels of managers regarding CSR reporting play a crucial role in determining the quality of CSR reports. Specifically, it is suggested that the quality of CSR reports is likely to improved when the current level falls short of managers’ aspirations for CSR reporting. Conversely, when the current quality of CSR reports surpasses managers’ aspirations, it is expected to decline. Additionally, this paper proposes that this effect will be stronger when the owner of the firm is government or the firm’s visibility is high. Using a comprehensive panel dataset covering Chinese listed firms with A‐shares from 2012 to 2018, the empirical findings strongly support these arguments.
... Risk refers to the estimated probabilities of the outcome and input process, while uncertainty is unknown because of the unstructured logical premises (Knight, 1921). Theoretically, the two concepts are different in assumptions, scope and scale (Alchian, 1951, Akerlof, 1970; practically, they reflect each other, appearing in various contexts together (Kahneman and Tversky, 1979, MacCrimmon and Wehrung, 1986, March and Shapira, 1987, Fiegenbaum and Thomas, 1988. ...
China and Pakistan took part in the Belt and Road Initiative (BRI) project through CPEC (China–Pakistan Economic Corridor), but it faced many challenges at the negotiation and implementation stages. While their firms and individuals have come closer to exploring the scope and scales of opportunities, they have faced difficulties associated with uncertainty and time (risk-taking behaviour directly and indirectly through time sensitivity). Culturally, the potential differences in the risk orientation are plausible, but the contextualised differences in the negotiation process are not clear at the style level of analysis. This article explores whether how and why the negotiation style of China and Pakistan differs despite the visible values ahead of them. Based on postgraduate students in business schools, we investigated the notion of risk-taking orientation and moderation of the time sensitivity to both sides. The survey was based on 1398 participants: 917 (66%) Chinese and 481 (34%) Pakistani participants responded to risk-taking (low-high) and time sensitivity (low-high). The results are consistent across models. Directly, Chinese negotiators are more risk-takers than Pakistani negotiators. Indirectly, time-sensitive Chinese negotiators are low risk-takers than time-sensitive Pakistani negotiators. The study extends the risk orientation and time-sensitivity in perceptual assumptions in the cultural context.
... Hence, multiple papers based on prospect theory were also reviewed to understand in what relevant scenarios has the theory been used in the past. (28), (34), (43) Another very important market research technique i.e., means end research theory was also considered to understand what series of instances goes on in a consumer mind while making certain decisions so as to understand consumer behavior better. It ensures that consumers actual needs are identified through various quantitative and qualitative approaches. ...
The objective of this study is to explore the intellectual development of consumer behavior in purchase of school books through previous published research studies. We try to explore as to what will be those factors that will directly have an impact on the purchase making decisions of the consumer i.e., the purchase intentions of print books. The constructs identified from the study shall provide significant insights to marketers to define and operationalize different strategies specially in education publishing industry which today stands at several thousand crores. This would also help them to understand as to what drives the consumers purchase intention in lieu of school books.
... If they win, they have something to lose, so they are relatively risk averse. This is called the "framing effect" (Tversky & Kahneman, 1989) and is related to the concept of "reference point" (Fiegenbaum & Thomas, 1988). Individuals (and firms) tend to be risk averse when they operate above their benchmark, usually defined as the status quo, and risk seeking when they operate below it. ...
Abstract
The mission of e-Government is to provide better, more efficient, and faster public services from central and local public administration to citizens and businesses.
In recent years, Kosovo has significantly increased the application of e-Government, which transforms the activities provided by Public Administration and had a great impact on citizens and businesses by making everyday procedures easier and more efficient.
E-Government brings great benefits to society. Benefits can be economic and social, including modernization of administration, education, health, justice, security, business, and trade development, increase in the budget, democracy, culture, scientific research, etc.
Within the modernization of the public administration through the extensive use of the Information and Technology Infrastructure the e-Government’s objective is to create a new dynamic relationship between Kosovo’s public administration, citizens, and businesses. By analyzing the current situation from the view of citizens and businesses, this paper will present the level and types of services offered by the government portal e-Kosova.
The purpose of this paper is to examine the impact of E-Government implementation on Kosovo institutions to citizens and the business community. In this paper, we intend to introduce the current situation and present the level of implementation of e-Government by analyzing results from the survey conducted by the Regional Cooperation Council 2021 edition of the Balkan Barometer for citizen and business perceptions in Western Balkan Countries.
During the short period of implementation, the e-Government in Kosovo faced certain challenges such Covid-19 pandemic, which will be the subject of elaboration in this paper.
Keywords: E-Government, Public Administration, e-Kosova, e-Government services.
... Among all citing work, the most prominent is Kahneman and Tversky's (1979) prospect theory, which cites Fishburn (1977b) as a predecessor, which is important because it already involves sign dependence. As Fiegenbaum and Thomas (1988) and Fiegenbaum (1990) emphasize, targets can be conceptualized as reference points. This interpretation of targets further connects the two works. ...
Peter Fishburn has had a tremendous impact on the field of decision analysis, developing ideas that would come to be foundational across decision analysis and that would impact the literature on decision making in economics, psychology, finance, engineering, and mathematics. This paper provides an overview of his legacy. We summarize 11 of his influential papers. We then trace his impact on recent research in topics including preference representation and elicitation, risk attitudes, time preferences, health preferences, behavioral decision making, social choice and voting, and geometric analyses.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/deca.2022.0461 .
... Finally, this study supports, on a corporate level, prospect theory, which posits that individuals act more quickly when their decisions are framed as a response to threat or risk rather than to opportunity (Dutton and Jackson 1987;Fiegenbaum and Thomas 1988;Kahneman and Tversky 2013). In our setting, ETSs are a new factor for mainland China accompanied by enormous uncertainty. ...
This study introduces the concept of carbon proactivity and considers not only the quantity of emissions but also corporate carbon-reduction efforts and actions to explore the relationship between carbon proactivity, the emissions trading scheme (ETS) mechanism, and corporate financial performance. A matched-pair approach was adopted to explore the difference in carbon proactivity between ETS and non-ETS firms. The study aims to investigate the impacts of an ETS on corporate carbon proactivity and whether participating in an ETS can help a firm achieve a desired outcome in which it can improve both environmental and economic performance. Using manually collected data on carbon disclosure, it was found that carbon proactivity is higher among firms that participate in an ETS than among those that do not, and carbon proactivity is trending upward for the participating firms. In addition, evidence suggests that while investing more resources in carbon proactivity decreases current financial performance, it will boost future financial performance. This relationship is observed among firms that participate in an ETS. This study extends the understanding of the relationship between ETSs, corporate carbon proactivity, and corporate financial performance. It also provides evidence on how to improve the ETS mechanism.
... Finally, there are eight industries 1 with 622 firms. 2 The data set that we have in our hands is time series. The firm's return is calculated as a median of the ROA series, and risk is calculated as a standard deviation of the ROA series, so we have a single observation against each firm (Fiegenbaum and Thomas 1988;Fiegenbaum 1990;Sinha 1994). We discarded (trimmed) those firms from the data set whose risk or return falls outside the three standard deviations to minimize the level of bias between estimated and true parameters (Chou et al. 2009). 1 Chemical and pharmaceutical, construction industry, engineering, financial institutions, food industry, fuel and energy, textile industry, and transport and communication. 2 Our data set might have some level of supervisor bias. ...
Prospect theory frequently explains the empirical results of Bowman's paradox (negative relationship between risk and return). However, the empirical econometric model of these researches is misspecified. This study used a data-driven approach to improve the econometric model. Empirical results based on the improved econometric model are also reinforced by data visualization to be illustrated in depth. For this purpose, we used the data of 622 listed firms on the Pakistan Stock Exchange from 2000 to 2019. Our results contradict the literature on prospect theory based on the improved econometric model.
... As these examples show, the "certainty effect" of prospect theory leads people to underweight the chance of experiencing gains that are probable but not certain, leading to risk-averse behaviors in the gains domain (Edwards, 1996). In particular, people with a stronger risk aversion underweight larger but potential gains to a greater extent relative to less risky ones than individuals with weaker risk aversion (Fiegenbaum & Thomas, 1988). Since the size of the tax benefits of debt depends on the firm's future profits, we expect decision makers from cultures with a higher risk aversion to be less confident about potential future earnings and, in consequence of this bias, to perceive such benefits to a smaller extent. ...
This study investigates how asymmetric risk preferences and national institutions co-determine how firms are financed across countries. We include prospect theory into the discussion of uncertainty avoidance and the institutional envelope in IB, and argue that country-specific bias in the evaluation of downside risks and upside potentials explain variation in how otherwise similar firms raise funds. Exploiting a unique dataset on risk preferences, we show that risk perception in general, and asymmetric risk preferences as predicted by prospect theory in particular, affect corporate capital structure. We also show that the national institutional envelope constrains these effects and discuss implications for international business research beyond capital structure. We test our predictions on a panel of 10,355 firm-year observations.
... 'beta' (which represents the sensitivity of the return on a firm's stock to general market movements) in CAPM model is considered as a measure of risk in a given portfolio of stocks (Markowitz, 1952). The financial economics researchers for example, (Bowman, 1980, Fiegenbaum, 1988 used prospect theory (Johnson, 1975c, Kahneman, 1979 to explain risk-return relationships (Miller, 1990). The performance of the firm in turn linked to firm's default risk (Party, 2002, Shapiro, 1986. ...
p>The objective of this research is to explore the extent to which insurance companies manage risks holistically. The objective is achieved through a naturalistic investigation of the understanding, motivation, design, challenges and performance of Enterprise Risk Management (ERM) in the insurance industry. The research begins by describing the broad context of risk management from an interdisciplinary perspective and the literature is used to develop a theoretical framework of ERM. Then the ERM initiatives of four major European re/insurers were empirically investigated. These are used to develop a practical framework of ERM. Theoretical and practical frameworks were compared and contrasted and propositions developed and discussed. These provide a substantive theory of ERM. In the literature review it was found that most research on ERM in the insurance sector is developed from financial and economic perspective, precluding the strategic aspects of risk particularly those involving aspects of organisational behaviour. The thesis argues that risk needs to be considered from a broader perspective beyond disciplinary silos. The research concludes that: there exists an uneven understanding of ERM across the insurance industry and the main reason is that risk is conceptualized in different disciplinary silos. Leadership of CEO and regulations turned out to be the key driving forces of ERM. The design of ERM in insurance companies was found to be similar across the industry. However, implementation of ERM varies extensively depending upon the organisation’s business model, market, expertise, and culture. ERM was not found to be a new phenomenon, rather a natural evolution of risk management. The forces leading to the development of ERM include increased sophistication of market and business and the increased awareness of risk.</p
... PF theory suggests that a firm that faces negative performance gaps is more likely to make organizational changes (Cyert & March, 1963;Moliterno & Wiersema, 2007). Negative performance gaps often make decision makers more willing to take the risks associated with change (Bromiley, 1991;Fiegenbaum & Thomas, 1988;Greve, 1998;Kahneman & Tversky, 1979). ...
Research summary
Negative performance feedback in offshoring service activities entices firms to undertake geographical reconfiguration of their global value chains (GVCs) as a substitute for, or complement to, change of governance modes, decomposition of offshored activities, or shift of local service providers. In this study, we build on performance feedback theory and the concept of problemistic search to examine the extent to which firms move offshored service activities to new countries when facing negative performance gaps. We also examine if these relocations take place within a search space limited by the managers' cognitive span. We formulate a set of hypotheses revolving around this idea of search within a limited space. Our hypotheses are supported when tested on a sample of global sourcing projects undertaken by 223 firms between 1995 and 2012.
Managerial summary
The essence of reconfiguration is the continuous search for efficient combinations of functions, local service providers (when functions are outsourced), governance modes, and—in our case—locations. Limiting the search for improved combinations to fewer locations entails a higher dependence on these locations maintaining the country‐location‐specific advantages that made them attractive in the first place. It is thus possible that multinational enterprise (MNE) managers who reconfigure their GVC in a geographically bounded way in the long run will struggle to compete with MNEs that search for optimality within a broader range of locations as possible remedies for the GVC operations that experience negative performance gaps.
... has been identified as a baseline reason influencing the entrepreneurial decision whether to persist with their venture (Keasey et al., 2014). A firm's degree of underperformance (Maclean et al., 2020) refers to the extent to which it performs below a set target, often defined as a social comparison with the industry average (Fiegenbaum and Thomas, 1988). When firm performance is below such a target, entrepreneurs are more likely to consider alternative actions and exhibit risk-taking behavior to achieve better outcomes (Chen et al., 2019;March and Shapira, 1987). ...
We theorize that both highly rational entrepreneurs and entrepreneurs with a high need for cognitive closure (NFCC) are likely to put more emphasis on retrospective factors (period and degree of underperformance, personal investments) and less on prospective factors (risk of going into default, potential for growth, personal options) when deciding whether to persist with an underperforming venture. Our findings from three discrete choice experiments with three independent samples of entrepreneurs (a sample of 176 Australian entrepreneurs; a narrow-replication with 128 Australian entrepreneurs; and a quasi-replication with 157 United Kingdom entrepreneurs) consistently show that entrepreneurs who perceive themselves as rational do not always demonstrate rational behavior and entrepreneurs with a high NFCC put more emphasis on retrospective factors in persistence decisions. Important theoretical and practical contributions flowing from our study are shared in the concluding section.
... K&T ont toutefois argumenté en faveur d'un point de référence égal à la richesse actuelle. Ils appellent ce référentiel : le statu-quo et le choisissent pour deux raisons : 1) Par commodité pour simplifier les équations et 2) Car ils estiment que la plupart du temps c'est probablement ce référentiel qui est utilisé par les individus comme semble le démontrer leur paradoxe présenté dans ce chapitre à la section 1. (Fiegenbaum & Thomas, 1988;Kameda & Davis, 1990;Lehner, 2000), les gains et pertes antécédentes (Arkes, Hirshleifer, Jiang, & Lim, 2008, 2010Baucells, Weber, & Welfens, 2011;Post, Van den Assem, Baltussen, & Thaler, 2008), un pic de richesse antécédent (Gneezy, 2005), le niveau d'aspiration (Camerer, Babcock, Loewenstein, & Thaler, 1997;Gerhard, Hoffmann, & Post, 2015;Payne, Laughhunn, & Crum, 1980), un référentiel stochastique basé sur les anticipations rationnelles des agents (Koszegi & Rabin, 2006, 2007, l'équivalent certain (Gul, 1991), le meilleur gain de la loterie qui n'a pas été choisi (Loomes & Sugden, 1982… ...
Dans cette thèse, nous nous intéressons à la prise de décision individuelle, dans un environnement risqué. Plus précisément, nous étudions l’effet de la taille de l’enjeu de loterie binaire, sur l’attitude des individus face au risque, et ce, pour différents niveaux de probabilités de gain.Dans un premier temps, nous avons étudié l’évolution du degré d’aversion au risque relatif, en fonction de l’augmentation du niveau d’enjeu de loteries. Nous avons mis en évidence que ce degré d’aversion augmente avec le niveau d’enjeu lorsque la probabilité de gain est faible, tandis qu’il reste constant pour les probabilités plus substantielles. Bien que ces résultats corroborent de récentes analyses en économie expérimentale, ils ne sont pas compatibles avec les modèles de décision existants. En effet, ce pattern comportemental semble remettre en question le principe de séparabilité des probabilités et des conséquences supposées par la plupart des modèles de décision.Dans un second temps, nous nous sommes intéressés à l’effet des enjeux antérieures sur la prise de risque subséquente. Nous avons mis en évidence que les comportements décisionnels sont fortement influencés par l’exposition antérieure, bien que les situations de choix soient fonctionnellement et explicitement indépendantes. Ces résultats s’inscrivent dans le modèle récemment proposé par Baucells, Kontek et Lewandowski (2018). Ce modèle suggère que la perception des conséquences d'une loterie est fonction du contexte, toutefois, il se différencie de la Prospect Theory puisqu’il suppose que, dans un contexte décisionnel donné, l’étendue des conséquences disponible sert de référentiel pour l’évaluation de l'ensemble des issues.A travers ces études, nous montrons que la perception des conséquences monétaires des loteries semble aisément manipulable et influence grandement les comportements décisionnels des agents.
... If there are gain conditions in which the focus is on opportunities rather than threats, no notice of monitoring might be too much of a risk. In contrast, people in perceived losing conditions find more risky activities acceptable because they feel there is less to lose (Fiegenbaum & Thomas, 1988). Not notifying employees of electronic monitoring might be more acceptable to reduce threats in the workplace. ...
As a variety of electronic monitoring methods such as global positioning systems are available, monitoring employees without notice is a consideration even though several laws ban it and ethical questions remain. Monitoring without notice has risks that Human Resources (HR) managers should consider when they set monitoring policies to enhance knowledge management. A total of 174 HR managers were asked about their top reasons to electronically monitor employees with or without notice. About half received information that a company did not notify employees of electronic monitoring and the other half received the opposite information. Prospect theory was the basis for collecting data to understand the importance of risk in setting policies. It states that people in perceived good conditions avoid risk because they feel there is more to lose than to gain. The leading reason to electronically monitor employees for both groups was computer virus and malware protection. Organizational threats associated with legal issues showed more HR support for monitoring without notice. Opportunities associated with employee productivity indicated relatively more support for monitoring with notice. As a result of this research, perceived threats in the workplace are significant reasons why HR managers might not provide notice of monitoring in the workplace. This has potential legal and ethical implications.
... Loss aversion refers to the fact that subjects are more inclined to avoid losses than gains when making decisions under uncertain conditions (Tversky, 1979). It has become an important hypothesis of behavioral decision theory and has been supported by the literature in the fields of economics (Rabin, 1998), organizational behavior (Fiegenbaum & Thomas, 1988), finance (Benartzi & Thaler, 1995). For example, Lin et al. (2008) took intercity travel between cities in Taiwan as an example to empirically study the loss aversion of passengers in the decision-making process of the transportation system. ...
The issue of e-waste recycling is imminent. With the continuous enhancement of Internet technology and people's awareness of sustainable development, the dual-channel reverse supply chain management combining online and offline becomes particularly important. In order to promote the sustainable development of dual-channel reverse supply chain recycling, this paper uses Stackelberg game and Rubinstein alternating offers bargaining game, and builds a dual-channel reverse supply chain model under the influence of loss aversion of recyclers and bargaining power of consumers. The purpose of this paper is to explore the recycling pricing decision of dual-channel reverse supply chain under the dual impact of loss aversion of recyclers and bargaining power of consumers. The results show that the increase in loss aversion of recyclers makes the recycling price of dual-channel recyclers decrease, but it increases their profits; the enhanced bargaining power of consumers raises the recycling price of products and increases the profits of members; the competition of recycling channels helps to improve the recycling price and profit of each member of the reverse supply chain. The results of this study provide theoretical basis for the members of dual-channel reverse supply chain to make optimal decisions in the case of bounded rationality, thereby promoting the sustainable development of reverse supply chain.
Vertex cover (VC) problem is an important combinatorial optimization problem that has a wide range of applications. In this article, we investigate the existing works on solving the VC problem from game theoretic perspective; these works treated each vertex of a network as a completely rational player. In contrast, we consider the impact of player's subjective behavior, that is, each player is not necessarily completely rational. First, we establish a game model under the expected utility theory (EUT) and the framing effect (FE) of the prospect theory. Second, we analyze the relationship between VC and game model under the EUT and the FE. Third, we propose a relaxed greedy behavioral algorithm, and prove that our proposed algorithm can guarantee that the strategies of all vertices converge to a strict Nash equilibrium under the EUT and the FE. Finally, the simulation results not only evaluate the influence of FE on the overall cover level of networks but also demonstrate the effectiveness and superiority of our proposed algorithm compared with the existing bounded rationality algorithm on representative networks and standard benchmark.
An important feature of family firms is that the controlling shareholders normally aim to maintain their investment in the long term. The theme of performance stability might be of great importance for a family firm’s survival over time. We hypothesize that family firm owner-managers are likely to choose as board members those outsiders who are able to help the firm overcome problems of performance stability over time. We then test the hypotheses through empirical analysis. Our findings suggest that the number of independents on the board of a family firm has no impact on performance stability. Instead, we find that interlocking directors can provide a significant contribution to the achieving of lower performance variability.
Challenging the established notion that women at the top are consistently risk averse, this study combines insights from social identity and socioemotional wealth (SEW) perspectives to propose a novel view of risk preferences by women and men CEOs in family businesses. It reframes risk preferences as behavioral responses by gender and family (managerial) role expectations relative to social aspirations. An empirical test of Italian firms provides support for the hypothesized effects. For firms above social aspirations, women family CEOs take more risk as performance declines than their men family counterparts; this gap in risk preferences attenuates for men/women nonfamily CEOs. For firms below social aspirations, these effects are reversed. This study contributes to research on gender identity and risk-taking in family firms by showing that women and men do not always behave according to gender stereotypes. Rather, due to malleability of gender identity, they enact differing risk behaviors across contexts. In addition, it advances SEW theory by unpacking the effects of distinct SEW dimensions on firm risk by gender identity.
Economic policy uncertainty is an evolving area of research that may affect environmental issues such as the carbon footprint. However, from a global perspective, it is not known whether economic policy uncertainty is significantly related to it. Motivated by this gap in the literature, we investigate the impact of economic policy uncertainty on carbon footprint. Using a sample of 2,782 firms from 60 countries, our cross-sectional regression analysis finds that economic policy uncertainty is positively associated with the carbon footprint. This applies to the total, direct, and indirect carbon emissions measurements. However, we find that countries with better institutional governance alleviate the significant association between economic policy uncertainty and carbon footprint.
This article discusses the history of the concept of adaptive aspirations, drawing on the origins of the term in the work on firm behaviour by Cyert and March. It discusses the fact that the process of adaptive aspirations is dynamic rather than static, drawing on the experience of organizations during a particular time period to formulate its future behaviour. There is discussion of the implications of this approach for the future of research and behavioural strategies, and a concluding section supplies some areas for future study in this area.
The concept of evolutionary 10.1057/978-1-137-00772-8_479 descends from cue learning psychology, synthesizing ideas on rational expectations with ideas on bounded rationality, to provide support for these ideas simultaneously. Evolutionary expectations are rational, but within cognitive bounds. Moreover, they are correlated among people who share environments because these individuals satisfice within their cognitive bounds by using cues in order of validity, as opposed to using cues arbitrarily. Any difference in expectations thereby arises from differences in cognitive ability, because two individuals with identical cognitive bounds will perceive business opportunities identically. In addition, because cues provide information about latent causal structures of the environment, changes in causality must be accompanied by changes in cognitive representations if adaptation is to be maintained. The concept of evolutionary expectations emphasizes not only that causal structure changes are common in social systems but also that causal structures in social systems, and expectations about them, develop together.
Risk taking is the willingness to accept the level of risk associated with a certain decision. In other words, it refers to making decision that entails risk. In this article, we focus on managerial risk-taking. We discuss the variable risk preference model in depth, summarize the effect of performance feedback on risk-taking, and highlight some of the strategy research on risk-taking that takes the upper echelon perspective of organizations. The variable risk preference model assumes that managers have two reference points in making risky decisions – aspiration point and survival point – and which reference point they pay attention to affects their risk-taking behavior. Performance feedback has an influence on risk-taking that often makes decision-makers take a more longitudinal perspective and change their risk attitudes. Some strategy research on managerial risk-taking that adopts the upper echelon perspective examines the linkages between trait and risk-taking behavior and between incentive structure and risk-taking.
Prospect theory is one of the most influential theories of decision-making under risk. The theory draws on psychology and has been proposed as an alternative to expected utility theory. It substitutes a value function for the utility function, and a decision weights function for probabilities. Its main ideas are that changes in wealth are more important than absolute levels of wealth for describing risk-taking, and that decision weights is a non-linear function of probability. We describe the theory’s main assumptions and its effects on strategy research and suggest a possible direction for its use in future research.
Purpose
This study aims to examine the phenomenon of the risk–return paradox from the resources side of the firm. The authors emphasize the moderating role of risk-taking capabilities in investigating the relationship between risk-taking and performance.
Design/methodology/approach
Building on the disciplines of the resource-based view, the moderating effects of risk-taking capabilities on performance were tested by using Taiwan listed companies' data from information technology and electronics industries. Based on the data from 216 firms for periods from 2003 to 2007, this study runs a hierarchical moderated regression analysis to test the hypotheses in the context of diversification.
Findings
The results of this study emphasize that risk-taking and its relationship with performance are context-specific. Significantly, it is contingent on the firm's risk-taking capabilities endowment. The findings also indicate that some aspects of risk-taking capabilities moderate the relationship between risk-taking and performance.
Originality/value
This paper emphasizes that risk-taking capability is an essential factor in investigating the risk–return paradox. It constructs the dimensions of risk-taking capability in terms of absorptive capacity, network resources and organizational slack. Firms equipped with a high level of risk-taking capabilities benefit from risk-taking activities and should, therefore, embrace risk.
We analyze asset managers' decisions to execute substantial baskets of stocks. Such transactions can be executed in two ways. The first method is through blind auctions with unique features known as blind principal bids (BPBs). The manager learns the trading cost once the auction process determines the commission. The second method is to use an agency trade. In this case, the asset manager faces an actual trading cost that is unknown before execution due to market impact uncertainty. Using proprietary data, we investigate the manager's choice between BPBs and agency trade in a natural experiment with large monetary stakes. The volume traded in each sample basket is significant, which can amount to over 0.5% of the NYSE daily share volume. Our findings show that managers' behavior is more consistent with prospect theory than the expected utility framework. When asset managers trade BPB baskets, they are reluctant to realize the potential higher cost of agency trade and opt for the fixed cost of BPBs instead. Thus, our results complement the literature on the disposition effect by demonstrating that managers' trading cost decisions exhibit “play it safe” behavior.
Purpose – The relationship between risk and return has been widely analysed in the scope of listed companies. However the present literature leaves uncovered an important study area with regards to privately held firms. In order to cover this gap, this study analyses the risk-return trade-off in the context of private enterprises. Furthermore,
the authors incorporate the contingent effect of being a family firm on the abovementioned relationship.
Design/methodology/approach – Using information from the SABI (Sistema de Analisis de Balances Ibericos) database, a sample of 2,297 private manufacturing firms were analysed for the period of 2009–2016. So as to ascertain the proposed hypotheses,
dynamic panel data methodology was applied. Specifically, the authors estimated the two-step general method of moments (GMM).
Findings – The obtained findings reveal that, according to prospect theory arguments, privately held firms adopt a conservative attitude toward risk when results are higher than a target level, while becoming risk seeking when results are lower than a target level. Moreover, the fact of being a family firm softens the riskreturn relationship both when performance is above the target level and also when firms find themselves in the
lowest performing case.
Originality/value – This article is, to the best of the authors’ knowledge, one of the first studies dealing with the risk-return relationship in a privately held firm context. Moreover, the inclusion of being a family firm as a contingent factor in the abovementioned link is a complete novelty.
This chapter addresses the ways in which we represent organizational events. This is the description of the various formats with which we collate or assemble organizational events under a single coherent description. There are several ways to describe organizational events—each of these with its own attributes, strengths, and weaknesses (Bannister and Griffith 1986; Boudreau 2015; Braunstein 1974; Chen et al. 2012; Geisler 2001).
Purpose
The purpose of this study is to examine the relationship between stock options compensation and firm strategic risk-taking, employing a quantile regression (QR) model. This study aims to analyze whether the impact of stock options on firm strategic risk-taking changes across various quantiles and investigates the moderating role of firm performance.
Design/methodology/approach
This study is based on a sample of 90 French firms for the period extending from 2008 to 2019. To deal with the non-uniform association, the authors use a panel quantile method.
Findings
The results reveal that the impact of chief executive officer (CEO) stock options on firm strategic risk-taking varies across risk-taking quantiles. More specifically, the study’s results show a positive association at low quantile levels of strategic risk-taking, measured by research and development (R&D) and a negative linkage at high levels. The authors also find that firm performance moderates the impact of CEO stock options on strategic risk-taking.
Research limitations/implications
The non-uniform relationship between CEO stock options and firm strategic risk-taking shows that the weight of CEO stock options in the total compensation can be a major determinant of the firm's strategic risk-taking attitude.
Originality/value
This study extends existing research on executive compensation and strategic risk-taking. Thus, this study has the potential to help stakeholders, board of directors and regulators, who are attempting to understand how the compensation contract – in particular, stock option pay – is related to the risk behavior of the agents and guide them to structure the executive compensation in an optimal way.
We investigate the unique role and mechanisms of industry growth in firms’ risk-taking policies. We find that industry growth is negatively associated with corporate risk-taking, consistent with the prospect theory that a high-growth industry gives firms a superior external environment, which may cause them to refrain from corporate risk-taking as in the saying “thinking of peace when rich.” This correlation is stronger for product market leaders, industries encouraged by industry policies and industries that receive more government support. Firms reduce risk-taking through various corporate policies, including long-term, high-value investments, operational efficiency and cash holdings in response to high industry growth. Overall, our results are consistent with industry growth negatively affecting corporate risk-taking.
We advance research on the managerial antecedents of exploration by studying personal, organizational, and environmental conditions under which a CEO’s risk propensity shapes a firm’s tendency to explore in product development. Our panel data analysis of 219 firms in the prepackaged software industry reveals that, when a CEO is risk-prone, the CEO’s ability to drive exploration increases with the CEO’s power in the firm, which manifests in tenure, duality, and insider origin. Counter to expectations, however, the firm’s accumulated exploration experience does not reinforce, but rather attenuates the effect of the CEO’s risk propensity on exploration. We attribute this to firms’ quest for balance between exploration and exploitation and the need to counter the CEO’s risk propensity when exploration becomes excessive. Finally, we find that competitive pressure in the firm’s product market reinforces the ability of a CEO who is more risk-prone to garner support for further exploration. Our study advances a dynamic perspective that relates the heterogeneity in firms’ exploration tendencies to the behavioral inclinations of their CEOs.
Funding: Dovev Lavie acknowledges his fellowship with the Invernizzi Center for Innovation, Organization, Strategy and Entrepreneurship and the ICRIOS Seed [Grant 25435].
This study investigates risk-seeking and optimal decisions of annuity providers. On the basis of a sample of U.S. life and annuity (L/A) insurers between 1997 and 2016, the results show clear performance-dependent risk attitudes. Specifically, insurers with returns below aspiration levels take more risks, whereas those with returns above reference levels decrease their risk-seeking, which supports the basic propositions of the cumulative prospect theory (CPT). Given initial evidence of mixed risk preferences in the L/A insurance industry, we derive an annuity insurer’s optimal investment and business strategies in a CPT decision-making framework. We show that changing risk preferences considerably affect an annuity provider’s decisions. We further illustrate how risk management changes an annuity insurer’s optimal strategies. Our results suggest that risk management lowers downside risk and allows a loss-averse decision maker to assume more risk and achieve a higher level of utility.
Rapidly changing environments press organizations to respond in an appropriateand timely fashion. Strategic control plays an important role in thisadaptation process through its identification and interpretation of "changetriggers" - critical events in the external environment that mandate anorganization's response. We argue that giving more prominent place to datainterpretation in the strategic control process facilitates the identification offactors that trigger change. We build a conceptual model around a three-stepprocess of scanning/monitoring, data interpretation, and response combinedwith three different levels of strategic control (strategic surveillance, premisemonitoring, and implementation control). The model assists managers by highlightingthe factors that can cause Type II errors (not changing when change isrequired) and provides researchers with directions for future inquiry.
Level of aspiration can be related to decision theory where an achievement scale is viewed as a scale of utility of achievement goals. One's level of aspiration can be reduced to the measurement of ordered metric goals which include a ranking of the goals and the distance between them. A behavioral model of decision making should contain not only subjective probability but also utility whose main concepts are LA and reinforcement effects. Given several choices the individual tries to maximize the subjective expected utility where utility is a function of LA and reinforcement. Experimental evidence supporting these ideas are given. 28 references.
There are many instances in which individuals can become locked into a costly course of action. Because it is often possible for persons who have suffered a setback to recoup their losses through an even greater commitment of resources to the same course of action, a cycle of escalating commitment can be produced. In this paper, I review recent research on the escalation of commitment and try to integrate its complex and often conflicting determinants.
Escalating commitment to a losing course of action is usually attributed to a need on the part of decision makers to maintain the illusion that they have not erred. Prospect theory suggests a different explanation for this commonly observed tendency-escalating commitment is seen as an artifact of the framing of decisions. As a result, escalating commitment may occur in a much wider variety of circumstances than is suggested by the view that it is a product of self-justification motives.
This article examines the explanation for risk/return. The content of corporate annual reports is analyzed in order to explore the hypothesis that low-profit companies are more likely to enter into new (riskier) ventures.
A model of strategic risk taking incorporating environmental, industrial, organizational, decision maker, and problem variables is presented. The model is intended to be both a preliminary conceptualization of strategic risk taking and a stimulant for future research on risk taking in strategic management decisions. Relevant research from a number of disciplines is summarized, and the potential impacts of particular variables on the propensity to take strategic risks are examined.
This paper investigates performance differences (in terms of ROA) between related and unrelated diversified firms. Two regression models of performance are estimated using a sample of 80 firms. Performance differences are associated with advertising expenditures, accounting determined risk, research and development expenditures and capital intensity. The models suggest that research and development expenditures are an important determinant in the performance advantage enjoyed by related diversified firms.
Based on a sample of 80 firms, this paper examines the risk/return performance of related and unrelated diversified firms at the level of accounting data. The results suggest that although on the average related diversified firms outperform unrelated diversified firms, related diversification offers no guarantee of a favorable risk/return performance. (Many low performers are related diversifiers.) In fact, different diversification strategies can result in similar risk/return performance. However, a favorable risk/return performance is extremely hard to achieve with unrelated diversification. The study identifies diversified firms that have managed to simultaneously reduced risks and increase returns. The results indicate that these firms differ from other firms on some managerially useful dimensions. The differences suggest clues to guide other diversified firms to improve their risk/return performance.
Sumario: The interrelationship of diversification strategy, organizational structure, and economic performance in large American industrial corporations is the subject of this study. In addition to investigating the relative prevalence of various types of strategy and structure, the relationship between strategy and structure, and the association between these two variables and economic performance, this study will be concerned with the validation of a research method that combines the managerially meaningful but essentially descriptive concept of diversification strategy with the analytic power of statistical techniques applied to large samples
Annual report content analysis is used to explore corporate strategy and elements of risk and return. Sets of reports from three industries, food processing, computer peripherals, and containers, show relationships which are otherwise difficult to obtain and which can be tested for validity. Revealed are a negative correlation of risk and return between companies within industries, and a tendency of troubled companies to seek risk. Profits following higher risk positions are explored in light of current finance theory using content analysis.
This paper empirically investigates the proposition that the organization and operation of the large enterprise along "M-form" multidivisional lines favors goal pursuit and least-cost behavior more nearly associated with the neoclassical profit maximization hypothesis than a number of alternative organizational forms. Using a sample of petroleum firms during the period 1955-1973, a positive relationship between M-form structure and profitability is observed during the period in which the M-form innovation was being diffused. This relationship is no longer observed once an organizational form equilibrium is achieved. The results provide support for the "Markets and Hierarchies" paradigm, but additional studies are needed to affirm the generality of the finding.
The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes
produce predictable shifts of preference when the same problem is framed in different ways. Reversals of preference are demonstrated
in choices regarding monetary outcomes, both hypothetical and real, and in questions pertaining to the loss of human lives.
The effects of frames on preferences are compared to the effects of perspectives on perceptual appearance. The dependence
of preferences on the formulation of decision problems is a significant concern for the theory of rational choice.
I. Summary, 278. — II. Introduction, 279. — III. Acceptance sets, 282. — IV. Some experimental evidence, 284. — V. Subjective
probabilities, 288.
The aim of this article is 2-fold: first to test the adequacy of Pareto distributions to describe the tail of financial returns in emerging and developed markets, and second to study the possible correlation between stock market indices observed returns and return's extreme distributional characteristics measured by Value at Risk and Expected Shortfall. We test the empirical model using daily data from 41 countries, in the period from 1995 to 2005. The findings support the adequacy of Pareto distributions and the use of a log linear regression estimation of their parameters, as an alternative for the usually employed Hill's estimator. We also report a significant relationship between extreme distributional characteristics and observed returns, especially for developed countries.
Principles of corporate finance Risk-return trade-offs for strategic management
- R Brealey
- S Myers
Brealey, R., & Myers, S. 1981. Principles of corporate finance. New York: McGraw-Hill Book Co. March Marsh, T. A., & Swanson, D. S. 1984. Risk-return trade-offs for strategic management. Sloan Management Review, 25: 35-51.