Firms' strategic risk taking behaviors

Date of Completion

January 2009


Business Administration, Management




This dissertation investigates the determinants and moderators of firms' strategic risk taking behaviors. Drawing on theoretical arguments in Kahneman and Tversky's (1979) prospect theory, Wiseman and Gomez-Mejia's (1998) behavioral agency model, and Cyert and March's (1963) behavioral theory of the firm, the study proposes a behavioral model of firm strategic risk taking that examines both the influences of high-powered incentives and past firm performance relative to the reference point on firms' strategic risk taking behaviors, including the contingent roles of organizational slack and the Sarbanes-Oxley Act of 2002 in moderating the base relationships. The empirical model is tested with two 14-year panel samples in the high-tech and low-tech manufacturing industries from 1992 to 2005 using the powerful discontinuous longitudinal modeling with random coefficient for a more robust examination of the hypotheses. ^ The findings suggest that in the low-tech manufacturing industry, in-the-money unexercisable stock options stimulates strategic risk taking, but organizational slack dampens strategic risk taking behaviors. Support was also found for the interactive influence of slack and restricted stock holdings on strategic risk taking. In the high-tech industry sector, the findings show the moderating role of the Sarbanes-Oxley Act (SOX) on the relationship between in-the-money unexercisable stock options and strategic risk taking. ^ This dissertation reviews the existing theories and literatures on high-powered incentives and performance relative to the reference point in association with risk taking. It develops a testable behavioral model of firm strategic risk taking behavior for these arguments. It is the first empirical study using large-scale panel datasets to systematically examine possible contingency effects based on industry context. ^