Jan Mammen

Performance feedback is an important concept to explain managerial risk taking. This paper aims to distinguish between two forms of performance feedback: A performance shortfall can be positively or negatively associated with risk inclination. The first effect arises for a shortfall from aspirations, while the second effect occurs if there is a shortfall from expectations. The hypotheses are tested on a sample of S&P 1500 firms over a period of 19 years (1992–2010) using a fixed effects regression model. The empirical results suggest that missing aspirations increases the likelihood of risk taking in the form of higher strategic investments. Missing expectations in contrast diminishes managerial power and discretion to engage in risk taking and thus lowers strategic investments. The results further support the idea that both effects reinforce each other, suggesting that shortfalls from expectations and aspirations have an interactive effect. By distinguishing between these two sides of performance feedback, this study provides an improved understanding on managerial risk taking. Additionally, this paper highlights how motivation and power interact when analyzing managerial risk taking.

The influence of corporate diversification on firm value is an important field in strategy research. Studies in strategic management and finance research have analyzed value creation through product and geographic diversification from a shareholder’s perspective. This study completes this picture by analyzing the bondholders’ perspective. It is suggested that product diversification creates value for bondholders, while geographic diversification destroys bondholder value. The hypotheses are tested on a sample of S&P 1,200 firms in 2001–2011 using a fixed-effects panel model. Drawing on prior research, bondholder value creation is measured using the Merton model. The empirical results support the hypothesis that bondholders gain value through product diversification but lose value through geographic diversification. Considering prior research results, these results show that product diversification is preferable for bondholders, while geographic diversification is preferable from a shareholder’s perspective. The opposite effects of both diversification strategies on shareholders, respectively, bondholders offer an important new perspective on corporate diversification. The results show that firms with a high level of corporate debt should struggle to justify a strategy involving geographic dispersion of activities and support a more diversified product portfolio strategy. This study also offers several avenues for investigating the bondholder’s perspective on corporate diversification in more detail.