Decoupling risk taking from income stream uncertainty: a holistic model of risk

TLDR

This paper builds and tests a holistic model of risk in organizations. Using structural equations modeling, we disaggregated risk into two distinct components, managerial risk taking and income stream uncertainty, or organizational risk. The model revealed that organizational and environmental factors promote risk taking, with behavioral theory of the firm and agency theory supported, while upper echelons theory was not; environmental effects on risk are indirect, mediated mainly through managerial choices. © 1999 John Wiley & Sons, Ltd.

Abstract

This paper builds and tests a holistic model of risk in organizations. Using structural equations modeling, we disaggregated risk into two distinct components, managerial risk taking and income stream uncertainty, or organizational risk. This allowed us to identify an array of organizational and environmental antecedents that have either been examined in isolation or neglected in previous studies about risk. Our results suggest that both organizational and environmental factors promote risk taking. Further, we found strong support for behavioral theory of the firm and agency theory on risk but not upper echelons theory. Our data also suggest that environmental characteristics have a negligible direct effect on organizational risk. Instead, the environment’s impact on risk occurs primarily through managerial choices. Copyright © 1999 John Wiley & Sons, Ltd.