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...industry which the firm competes largely regulated or deregulated (Cheng and Kessner, 1997; Geiger et al., 2001; Mahon and Murray, 1981). However, with only a few exceptions (e.g., Barnett et al., 1993; Geiger and Hoffman, 1998), analysis of competitive behavior in regulated environments has not received much attention in strategy research. Moreover, little research has examined the dynamic nature of competitive forces as firms and industries experience change in their regulatory environment. This opportunity in the literature is significant and inviting.
The primary goal of this study is to investigate the impact that the regulatory environment has on certain key variables. Specifically, we examine the impact of regulation on the relationship between a firm's slack resources, and the propensity of managers to invest in activities that are high risk (i.e., they have uncertain outcomes) (Palmer and Wiseman, 1999). These two concepts, organizational slack and firm risk-taking, are concepts that are central to organization theory. Theorists have been interested in these constructs because of their perceived importance in determining firm adaptability, decision making, and performance (Francis et al., 2004; Nohria and Gulati, 1996; Singh, 1986). Yet even though the general relationship between a firm's slack and its strategic actions has received considerable attention (e.g. Bromiley, 1991; Bourgeois and Singh, 1983; Geiger and Cashen, 2002; Greve, 2003; Lee and Grewal, 2004; O'Brien, 2003), these studies have not yielded consistent findings. Moreover, understanding the role of the regulatory environment in this situation is crucial, as the ability to engage in risk-taking behavior, and the actual behaviors taken, likely differs depending on the regulatory environment. By examining this issue, this study seeks to address the aforementioned gap in the literature and provide an answer to the question "Is the relationship between a firm's slack and its risk-taking behavior impacted by the level of industry regulation."
In the following two sections we review relevant research and develop our hypotheses. We then provide detail concerning our methodology and the results of our empirical analysis. We close with a discussion of the results and concluding comments.
LITERATURE REVIEW
Firm Slack and Risk-taking Behavior
Slack. Organizational slack represents the degree to which firms have access to resources needed to either react to unexpected crises or take advantage of emergent opportunities (Cyert and March, 1963). It is not possible for a firm to survive long without the presence of resources above and beyond its immediate needs. Thompson (1967) explained well the need for firms to buffer their "technical core" against environmental uncertainty through slack resources. Thompson further suggested a dual role for slack--as a buffer in the short run against uncertainty, and in the long run as a source of flexibility, such flexibility representing a certain "freedom from commitment" to be employed toward "opportunistic surveillance" (1967: 150-151). This process has been referred to in the management literature as "slack search" (March, 1981), referring to the possibility that slack resources may encourage managers to seek opportunities to engage in risky courses of action.
In exploring the role of slack resources in firm outcomes, researchers have had to distinguish between various types of slack. Some resources are less committed to existing operations than are other resources, and we refer to these less committed resources as available (unabsorbed) slack. External resources (e.g., debt financing) that can become available to the firm through debt financing, issuing equity, and the like we refer to as potential (absorbed) slack (Bourgeois, 1981). These different types of slack are well established in the literature. Because research has shown that each type of slack can have a different impact on organizational outcomes, researchers have called for studies examining slack from a multidimensional perspective (e.g., Geiger and Cashen, 2002; Singh, 1986). Consistent with that perspective, this research tests for the impact of two types of slack--available and potential.
Risk-taking. Numerous studies have examined the impact of slack resources on a firm's risk-taking behaviors, often as it pertains to a firm's innovative activities. Palmer and Wiseman (1999) note that risk has been defined and measured in different ways. One approach views risk as the likelihood that an organization may experience uncertain and volatile income streams, or organizational risk (e.g. Kim et al., 1993). Palmer and Wiseman (1999) identify another type of risk-taking, managerial risk, as those decisions that managers make concerning investing resources in activities with uncertain outcomes. Decisions related to issues of innovation, diversification, capacity expansion, pricing strategies and the like are indicative of these risk-taking behaviors (e.g. Pablo et al., 1996). It is this latter type of risk-taking that we examine here. Similar to Palmer and Wiseman, we view risk-taking as the strategic behaviors that a firm takes that have unpredictable consequences. Yet rather than looking at any particular firm action as an isolated event, here we define risk-taking in relative terms. Specifically, we assess risk-taking in terms of the extent to which a firm's competitive actions differ from those of other firms in the industry.
Managerial Risk in Competitive Profiles. While it is well-established that firms seek rents through first-mover advantages based on entrepreneurial or risky actions (Grimm and Smith, 1997; Lieberman and Montgomery, 1988), it is also likely that such actions may invoke institutional forces that often punish organizations (i.e., loss of legitimacy) to the extent that their structures and actions do not conform to the norms of their field. Conforming isomorphism serves both to signal the legitimacy of the firm and to reduce environmental uncertainty (Deephouse, 1999; DiMaggio and Powell, 1983). As firms develop competitive profiles similar to their rivals and peers, they reduce the risk associated with the uncertain outcomes of their actions. At the same time, firms that take actions and develop profiles that are vastly different from their organizational set in search of first-mover advantages also face the sanctions of the normative environment (e.g., loss of legitimacy) in the short run (Scott, 1998).
Technical forces also act against the development of strategic profiles that differ from established norms. Since firms benefit (in terms of operational efficiency) from the establishment of technical rationality in their field, development of strategic profiles that differ markedly from the industry norm is again inherently risky as it requires the firm to operate outside of the efficiency of the established technological regime (Winter, 1994). Thus, we believe that firms choosing to seek competitive advantages by engaging in actions that result in unique competitive profiles display a level of risk consistent with the uniqueness of their strategic profiles. Such action on the part of managers represents willful deviation in pursuit of competitive advantage.
Risk and Slack. Previous studies that have examined the relationship between slack resources and risk-taking behaviors have been somewhat inconclusive. We echo the sentiments of Nohria and Gulati, who lament, "[t]he literature provides no clear answers because theorists stand divided on whether slack facilitates or inhibits innovation" (1996: 1245), with innovation in this case representing one form of organizational risk-taking. For example, some researchers have argued that slack allows firms the luxury of engaging in risk-taking and/or innovative behavior (Cyert and March, 1963; Bourgeois, 1981; Greve, 2003; O'Brien, 2003; Sidhu et al., 2003). Support for this position was provided by Singh (1986), who hypothesized that both available and potential slack would increase the degree to which managers made high-risk decisions. While his research did not find this relationship for available slack, potential slack was found to be positively related to risk-taking behavior. Slack has also been posited to have a negative effect on risk-taking (e.g., Williamson, 1964). The argument here is that slack is wasteful and leads to satisficing behaviors by managers. Palmer and Wiseman's (1999), in their study of 235 manufacturing firms, did indeed find that slack resources were negatively related to managerial risk-taking.
Some researchers have hypothesized a more complex relationship between firm slack and risk-taking. For example, Nohria and Gulati (1996) found evidence that a non-linear relationship exists between firm slack and risk-taking. Their analysis found evidence of an "inverted U-shaped" relationship between organizational slack and innovation, suggesting that firms with moderate levels of slack are the most innovative. Building upon Nohria and Gulati's work, Geiger and Cashen (2002) examined slack in its different varieties and also found evidence of an inverted U-shaped relationship for available and recoverable slack, while finding a simple positive relationship for potential slack, using innovation as their dependent variable.
In an earlier study, Bromiley (1991) also hypothesized a non-linear relationship between slack and...
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