An Examination of Firm Slack and Risk-Taking in Regulated and Deregulated Airlines

Abstract

The regulatory environment firms must navigate has a significant influence on their competitive behaviors. While competition between firms exists in all environments, it is also apparent that there are significant differences in the level and type of competition depending on whether the industry in which the firm competes is largely regulated or deregulated (Cheng and Kessner, 1997; Geiger et al., 2001; Mahon and Murray, 1981). However, with only a few exceptions (e.g., Barnett et al., 1993; Geiger and Hoffman, 1998), analysis of competitive behavior in regulated environments has not received much attention in strategy research. Moreover, little research has examined the dynamic nature of competitive forces as firms and industries experience change in their regulatory environment. This opportunity in the literature is significant and inviting. The primary goal of this study is to investigate the impact that the regulatory environment has on certain key variables. Specifically, we examine the impact of regulation on the relationship between a firm's resources, and the propensity of managers to invest in activities that are high risk (i.e., they have uncertain outcomes) (Palmer and Wiseman, 1999). These two concepts, organizational and firm risk-taking, are concepts that are central to organization theory. Theorists have been interested in these constructs because of their perceived importance in determining firm adaptability, decision making, and performance (Francis et al., 2004; Nohria and Gulati, 1996; Singh, 1986). Yet even though the general relationship between a firm's and its strategic actions has received considerable attention (e.g. Bromiley, 1991; Bourgeois and Singh, 1983; Geiger and Cashen, 2002; Greve, 2003; Lee and Grewal, 2004; O'Brien, 2003), these studies have not yielded consistent findings. Moreover, understanding the role of the regulatory environment in this situation is crucial, as the ability to engage in risk-taking behavior, and the actual behaviors taken, likely differs depending on the regulatory environment. By examining this issue, this study seeks to address the aforementioned gap in the literature and provide an answer to the question Is the relationship between a firm's and its risk-taking behavior impacted by the level of industry regulation. In the following two sections we review relevant research and develop our hypotheses. We then provide detail concerning our methodology and the results of our empirical analysis. We close with a discussion of the results and concluding comments. LITERATURE REVIEW Firm Slack and Risk-taking Behavior Slack. Organizational represents the degree to which firms have access to resources needed to either react to unexpected crises or take advantage of emergent opportunities (Cyert and March, 1963). It is not possible for a firm to survive long without the presence of resources above and beyond its immediate needs. Thompson (1967) explained well the need for firms to buffer their technical core against environmental uncertainty through resources. Thompson further suggested a dual role for slack--as a buffer in the short run against uncertainty, and in the long run as a source of flexibility, such flexibility representing a certain freedom from commitment to be employed toward opportunistic surveillance (1967: 150-151). This process has been referred to in the management literature as slack search (March, 1981), referring to the possibility that resources may encourage managers to seek opportunities to engage in risky courses of action. In exploring the role of resources in firm outcomes, researchers have had to distinguish between various types of slack. Some resources are less committed to existing operations than are other resources, and we refer to these less committed resources as available (unabsorbed) slack. External resources (e.g., debt financing) that can become available to the firm through debt financing, issuing equity, and the like we refer to as potential (absorbed) (Bourgeois, 1981). …

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