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

TLDR: This article examined the risk of firms in decline based on the behavioral theory of the firm, including six basic variables: (1) performance, (2) slack, (3) aspirations, expectations, risk (income stream uncertainty), and (6) organization size as a measure of decline.

Abstract: Scholars who study organizational decline have argued that declining organizations reduce or eliminate their riskier activities such as innovation. Further, they cite reduced risk-taking as a primary contributor to further decline. Scholars with an interest in risk per se come to the opposite conclusion: low performing firms often take more risks than other firms and such risks reduce subsequent performance. This study attempts to resolve these conflicting views by examining the risk of firms in decline. Our model, based on Cyert & March's (Cyert, R. M., J. G. March. 1963. A behavioral theory of the firm. Prentice-Hall, Englewood Cliffs, NJ.) behavioral theory of the firm, includes six basic variables: (1) performance, (2) slack, (3) aspirations, (4) expectations, (5) risk (income stream uncertainty), and (6) organization size as a measure of decline. The estimated model includes prior levels of risk and performance in the risk and performance equations respectively as controls. This study uses data on 34...