Managerial Risk Taking

Abstract

Managerial risk taking is a critical aspect of strategic management. To improve competitive advantage and performance, managers need to take risks, often in an uncertain environment. Formal economic assumptions of risk taking suggest that if the expected values for two strategies are similar but one is a greater gamble (uncertain), managers will choose the strategy with a more certain outcome. Based on these assumptions, agency theory assumes that top managers should be compensated or monitored to achieve better outcomes. We review the theory and research on agency theory and managerial risk taking along with theories that challenge this basic assumption about risk taking: the behavioral theory of the firm, prospect theory, the behavioral agency model and the related socioemotional wealth perspective, and upper echelons theory. We contribute to the literature by reviewing and suggesting research opportunities within and across these theories to develop a comprehensive research agenda on managerial risk taking.

To Merge, Sell, or Liquidate? Socioemotional Wealth, Family Control, and the Choice of Business Exit

“…Second, unlike prior studies that use the SEW construct in an "all or nothing" fashion (Hoskisson et al, 2017), our theory and results suggest that while all the SEW stock is completely lost in the case of firm sale or liquidation, some SEW flow can be preserved by family owners (Chua et al, 2015) in the case of a merger, rendering this option the preferred choice when business exit is unavoidable. Faced with a tradeoff between avoiding financial losses and preserving non-economic wealth, family owners are likely to choose a mode of exit that mitigates financial losses and ensures the future option of continuing to extract some SEW from the firm.…”

“…That is, "family firms are willing to trade risk reduction for SEW conservation when performance hazard is higher" (Gómez-Mejía et al, 2010: 232). Our theory extends this logic by suggesting that the SEW preservation motive becomes stronger, not weaker (Gómez-Mejía et al, 2011;Hoskisson et al, 2017), when paired with greater performance hazards. Under duress, family owners do not make strategic choices that result in increased financial benefits but tend to increasingly prioritize socioemotional objectives in deciding whether to exit or continue the business.…”

“…Extending the behavioral agency model (Gómez-Mejía et al, 2011;Hoskisson et al, 2017;Wiseman & Gómez-Mejía, 1998), we provide a more fine-grained understanding of the unique role and diverse logic of dominant family and non-family owners of privately held firms with respect to exit choices. Extending the literature on business exit, our work specifically reveals that family owners are increasingly less sensitive than their non-family counterparts to greater negative performance feedback when confronted with the exit or continue options.…”

“…conditions, yet they prioritize financial returns when stressed and paradoxically focus less on SEW (Gómez-Mejía et al, 2011;Hoskisson et al, 2017;Zellweger, 2017). That is, "family firms are willing to trade risk reduction for SEW conservation when performance hazard is higher" (Gómez-Mejía et al, 2010: 232).…”

Attention and foresight in organizations

“…Researchers have extensively modeled how risk preferences vary depending on the probabilities (besides 50-50 gambles) and the amounts involved (Hoskisson et al, 2017;Tversky & Kahneman, 1981). Beyond gain or loss, the magnitudes of the payoffs matter as well.…”