Although the behavioral theory of the firm posits that performance shortfalls trigger problemistic search, the actual performance consequences of problemistic search remain an open question. We argue that certain cognitive, affective, and behavioral mechanisms triggered by performance shortfalls make managers more aware, attentive, motivated, and disciplined, resulting in adaptation, learning, and enhanced firm value. Furthermore, differences in the extent to which managers feel pressured to adapt, and have the ability to adapt, can shape managerial awareness, motivation, and capability, and hence firm value. Our empirical analysis, using data for a sample of US manufacturing firms (1994–۲۰۱۳), confirms that problemistic search enhances firm value, and this association is strengthened when firms face greater pressure to adapt or have a greater ability to adapt.

Introduction

Rational choice paradigms in economics propose that managers make strategic investments based on a rational profit-maximizing calculus, and therefore view performance feedback as largely irrelevant to resource allocation and change in organizations. In contrast, a significant body of work on the behavioral theory of the firm (BTF) identifies attainment discrepancy (i.e., performance below aspiration) as a central driver of strategic investment (Greve, 2003a), theorizing that negative feedback draws attention to problems and motivates managers to engage in ‘problemistic search’ for solutions with a view to closing the performance-aspiration gap (Cyert & March, 1963; Greve, 2003a). This work implicitly assumes that problemistic search triggered in response to negative performance feedback facilitates adaptation that closes the performance-aspiration gap by improving future performance (Cyert & March, 1963; Greve, 2003a; Posen, Keil, Kim, & Meissner, 2018). However, despite extensive research in BTF on how performance-feedback shapes problemistic search in the form of strategic resource allocation and change in organizations (Greve, 2003a), prior research has not explicitly examined if strategic investment under attainment discrepancy indeed enhances future performance, as envisaged in the BTF.