Less Likely to Fail: Low Performance, Firm Size, and Factory Expansion in the Shipbuilding Industry

The behavioral theory of the firm and prospect theory predict that performance below an aspiration level increases risk taking, but researchers also propose that performance below an aspiration level decreases risk taking. These conflicting predictions primarily hinge on whether decision makers perceive negative performance as a repairable gap or as a threat to firm survival. This study examines a boundary condition of these conflicting predictions. We argue that a firm’s resource endowment affects decision makers’ risk tolerance: Managers in firms with large stocks of resources are buffered from the threat of failure and conform to the prediction of greater risk taking in response to performance decreases;…