Philip Bromiley

Testing a Causal Model of Corporate Risk Taking and Performance

The determinants of organizational risk taking and its impact on economic performance are critical issues in strategic management. Using a model that included risk, performance, performance expecta...

Strategic Risk and Corporate Performance: An Analysis of Alternative Risk Measures

This study demonstrates that the various measures of corporate risk strategic management research has used reflect different risk factors. Factor analysis of nine measures of risk yielded three fac...

Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation

Despite the many undesirable outcomes of corporate misconduct, scholars have an inadequate understanding of corporate misconducts causes and mechanisms. We extend the behavioral theory of the firm, which traditionally assumes away the possibility of firm impropriety, to develop hypotheses predicting that top management incentive compensation and poor organizational performance relative to aspirations increase the likelihood of financial misrepresentation. Using a sample of financial restatements prompted by accounting irregularities and identified by the U.S. Government Accountability Office, we find empirical support for both incentive and relative performance influences on financial statement misrepresentation.

The Free Cash Flow Hypothesis for Sales Growth and Firm Performance

The paper investigates the agency argument that sales growth in firms with free cash flow (and without strong governance) is less profitable than sales growth for firms without free cash flow. It also tests whether strong governance conditions improve the performance of firms with free cash flow and/or limit the investments in unprofitable sales growth. Consistent with agency theory, firms with free cash flow gain less from sales growth than firms without free cash flow. But different governance conditions affect sales growth and performance in different ways. Having substantial management stock ownership mitigates the influence of Free Cash Flow on performance, despite allowing higher sales growth. In contrast, outside blocks held by mutual funds reduces sales growth substantially, but does not increase performance from sales growth.

THE RELATIVE INFLUENCE OF INDUSTRY AND CORPORATION ON BUSINESS SEGMENT PERFORMANCE: AN ALTERNATIVE ESTIMATE

Rumelt’s (1991) widely cited paper presents estimates of the relative influence of industry, corporate, business unit, and other influences on business unit profitability. He finds corporations explain almost none of the variability in business unit profitability. Using a simultaneous equation model, we provide alternative estimates of the influence of industry and corporation on business unit performance. We find that both corporations and industries influence business unit profitability but corporations have the larger influence. Copyright

Assessing the dynamic capabilities view: spare change, everyone?

Why do some firms succeed in a dynamic competitive environment when others fail? Recently, concepts and models addressing this question have increasingly clustered around the dynamic capabilities view (DCV). Citation counts suggest that the DCV is the new touchstone firm-based performance-focused theory (Teece et al. [1997], for example, had received 1180 citations in the ISI Web of Knowledge as of June 2008), and case studies of innovative firms such as IDEO (Hargadon and Sutton, 1997) have fueled interest. We take a step back to assess the ability of the DCV to explain successful change with logical consistency, conceptual clarity and empirical rigor, criteria suggested by Laudan (1977). Such an assessment is important not only because of the DCV’s popularity, but also because of the theoretical and practical significance of the issues it addresses. While the arguably static resource-based view (RBV) emphasizes the value of resources, the DCV addresses the need to explain changes in valuable resources, e.g. the erosion of asset stocks (Dierickx and Cool, 1989) and the changes in asset values (Miller and Shamsie, 1996). The DCV also addresses a practical need to understand how firms can change effectively, given perceptions that many competitive environments now change at increasing rates, and that firms have difficulty changing successfully (Beer and Nohria, 2000; Strebel, 1996). Our assessment identifies four major problems that limit the potential contribution of the DCV: (1) unclear value-added relative to existing concepts; (2) lack of a coherent theoretical foundation; (3) weak empirical support; and (4) unclear practical implications. Although potentially interrelated, each problem presents different difficulties and raises different questions.

What does a small corporate effect mean? A variance components simulation of corporate and business effects

In a widely cited paper, Rumelt (1991) presents estimates of the relative influence of corporate, business unit, and other influences on business unit profitability and finds the corporation explains almost none of the variability in business unit profitability. Using a Monte Carlo simulation, we examine the relation of variance component magnitudes to other indicators of the importance of a particular effect. Our results demonstrate that variance components can be an extremely nonlinear indicator of importance. We also question whether Rumelts corporate effect represents the possible contributions of corporate strategy to business unit performance. This addresses a puzzle raised by Rumelt (1991) concerning the small effect of corporations in explaining performance, and suggests that Rumelts findings should not be seen as demonstrating the insignificance of corporate strategy.

DECISION MAKING IN AN ORGANIZATIONAL SETTING: COGNITIVE AND ORGANIZATIONAL INFLUENCES ON RISK ASSESSMENT IN COMMERCIAL LENDING

Although management researchers would like to understand management decisions related to risk, almost all previous research on risk has used either experiments or aggregate corporate data rather than data from actual business decisions. In this initial research on risk in actual business decisions, we examined the risk assessments bankers assigned to commercial borrowers. We tested hypotheses derived from research in strategy, finance, and behavioral decision theory in order to assess the influence of both organizational and cognitive factors on the likelihood of risk assessment errors. Although we found that both organizational and cognitive factors influenced risky decision making, when both were present, organizational factors appeared to overwhelm cognitive biases. Large literatures have developed to explain risk-related behaviors at the individual (behavioral decision theory), organizational, and corporate (finance and strategic management) levels. These literatures reveal a great deal

Risk and Return in Organizational Decision Making

Examining the association between managerial assessments of risk and expected return using nonexperimental data from specific commercial lending decisions, we found that risk-return associations de...

BANKING ON COMMITMENT: INTENDED AND UNINTENDED CONSEQUENCES OF AN ORGANIZATION'S ATTEMPT TO ATTENUATE ESCALATION OF COMMITMENT

Examining commercial lending decisions, we found that increased monitoring of decision makers and changing decision makers attenuated escalation of commitment but also produced unintended effects. ...