Decomposing Uncertainty and Its Effects on Imitation in Firm Exit Decisions

Abstract

T his study examines the effects of different uncertainty types on interorganizational imitation in firm exit decisions.We draw on herding models to conceptualize exit decisions as being based on a firm's private information, which the firm updates with information inferred from observing the actions of others. We posit that different types of uncertainty differentially affect this observational learning process; in particular, we propose that certain uncertainty types attenuate (rather than foster) observational learning and subsequent imitation. We test this theory using a 29-year panel data set on the exit of private venture capital firms. Our results indicate that observational learning does influence imitation in firm exit decisions, and they also suggest that a common belief-that uncertainty enhances imitation-does not apply to all types of uncertainty. Specifically, we find that uncertainty fosters imitation only when it is idiosyncratic to the firm; uncertainties that are common to all firms, in contrast, actually reduce reliance on observational learning. By decomposing uncertainty into different types and explicating their effects on imitation, we demonstrate that this relationship is more nuanced than previously assumed and, in addition, highlight the role of deliberate information processing in imitation.

The copycat CMO: firms’ imitative behavior as an explanation for CMO presence

“…Inference uncertainty To measure inference uncertainty, we applied the measure that Gaba and Terlaak (2013) propose. In addition to the level of inconsistency in peers' decisions to create or dispose of the CMO position, the measure incorporates the absolute amount of information reflected in these decisions.…”

“…To provide a comprehensive view of uncertainty that incorporates multiple levels of analysis, we consider the three types of uncertainty proposed by Gaba and Terlaak (2013): market uncertainty, firm uncertainty, and inference uncertainty.…”

“…Imitation behavior and inference uncertainty Inference uncertainty stems from inconsistency in the information a firm infers from its peers' behavior (Gaba and Terlaak 2013). When there is a high level of inference uncertainty, the information gleaned from peer adopters of a practice and peers who reject the practice is about equal, so the firm must make an imitation decision based on conflicting observations.…”

All Things Great and Small: Organizational Size, Boundaries of the Firm, and a Changing Environment

“…Similarly, research also suggests a link between various constructs that size represents and a firm's exit decisions and modes. For example, findings indicate that exit decisions may indeed be affected in part by firm-level resources such that larger venture capital firms are less likely to exit an investment (Gaba & Terlaak, 2013). However, other findings indicate that resources do not necessarily influence the mode of exit pursued (Chang & Singh, 1999).…”

Following in Partners’ Footsteps: An Uncertainty‐Reduction Perspective on Firms’ Choice of New Markets

“…As a result, firms may follow market leaders (Haveman, ) or their competitors (e.g., Cho et al, ) into new markets. In the VC industry, for example, firms have been shown to follow others into ‘hot’ market domains (Sorenson and Stuart, ) and, in the face of firm‐specific uncertainty, out of the industry (Gaba and Terlaak, ).…”