Abstract

Research on performance feedback, growing out of the behavioral theory of the firm, argues that organizations are more likely to undertake organizational change when firm performance declines below aspirations – or satisfactory levels for performance. Despite the substantial growth of research in this area, few studies consider how cognitive limitations and personal preferences of decision makers might influence this process. A potential reason is that the majority of studies investigated responses to performance feedback in the context of large public organizations where, as we argue, large managerial structures and external oversight may reduce the influence of personal preferences and behavioral biases on organizational-level decisions.

Focusing on private firms, our theoretical development suggests how governance structures can prohibit that self-enhancing cognitions of decision makers bias strategic decision making. Specifically, we contend that governance characteristics such as management team size, independence and turnover can limit the extent to which decision makers feel personally responsible for poor performance and subjectively assess low performance as satisfactory. This leads to theoretical predictions about how governance influences the likelihood that decision makers implement strategic change in response to poor performance.

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