The role of top management teams in firm responses to performance shortfalls

Abstract

Past research rooted in the Behavioral Theory of the Firm has extensively examined the impact of performance feedback on organizational change and risk taking, finding robust effects that performance shortfalls enhance the risk taking of firms. We argue that the strength of this effect is likely to be contingent on the attributes of the firm’s top management team. To enhance our understanding of which firms are more likely to be sensitive to performance cues, we draw on the Upper Echelon Theory to theorize that key structural attributes of the top management team—tenure and gender diversity, size, and pay disparity—affect how top executives interpret poor performance and act upon it through engagement in strategic risk taking. Results show that top management teams with greater tenure diversity, smaller size, and smaller pay disparity among members engage in more strategic risk taking following performance shortfalls.