Association of Risk Attitude with Market Diversification in the Construction Business

Abstract

In construction, many large firms are diversified, and their diversification is recognized as a corporate strategy for growth and risk management. Diversification indicates extended competition into a different market sector. It is a departure from a firm’s experience base, and it can be riskier than improving performance in the currently operating market. Then, contractors’ diversification and their aggregate pattern in the market, if there is any, are realized outcomes through competition among contractors over different market sectors. The competing contractors may have different risk attitudes, which are the subconscious but critical basis of their risk-taking behaviors in competition. This study investigates the association of contractors’ organizational risk attitudes with their diversification on the basis of simulated competition among multiple contractors. The simulation replicates the actual diversification pattern of large U.S. construction contractors. The results provide new insight on the relationship between contractors’ risk attitude and their diversification as well as their competitive success.