Investment and the behavioral theory of the firm: evidence from shipbuilding

Abstract

Investment in production assets is a strategic decision that results from organizational search and risk taking. The behavioral theory of the firm predicts that performance below the aspiration level and slack resources initiate organizational search. Risk theory predicts that performance below the aspiration level increases risk tolerance. This paper integrates these theories to form a theory of problem- and slack-driven strategic change and applies it to the growth of production assets. The predictions are tested by analyzing the growth of production assets in the Japanese shipbuilding industry, yielding clear evidence that high performance causes low asset growth, but no effect of slack. Copyright 2003, Oxford University Press.

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