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Professor Philip Bromiley
Title: “Is R&D Risky”
Co-authors: D. Rau
Accepted at: Strategic Management Journal

April 2016

Many studies use R&D intensity or R&D spending as a proxy for risk-taking, but we have little evidence that either associates positively with firm risk. We analyze the relations between R&D intensity (R&D spending to sales) and R&D spending on the one hand and eleven different indicators of firm risk on the other, using data from 1,907 to 3,908 firms in various industries over 13 years. The analysis finds a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different constructs. We discuss potential reasons for these non-significant results. Our study demonstrates that researchers should avoid casual use of R&D as a proxy for risk taking, without explicitly providing a clear definition and measurement model for risk.




Professor Philip Bromiley
Title: “Towards a Practice Based View of Strategy”
Co-author: Devaki Rau
Accepted at:
Strategic Management Journal
April 2014


Many studies in strategic management attempt to explain macro-level firm behaviors or characteristics and/or the influence of such behaviors or characteristics on firm performance.  Contrast this approach with the approach in operations research or parts of marketing research.  Operations research largely develops techniques intended to help managers.  Likewise, much of marketing emphasizes techniques (conjoint analysis, hedonic pricing, etc.) that tie to the specific decisions marketing managers make.  Current strategy scholarship, however, rarely considers specific, actual techniques managers might use to develop strategies or generally-applicable firm practices (outside a few areas such as executive compensation).

We propose a practice based view (PBV) of strategy scholarship to address this gap. We define a practice as a defined activity or set of activities that a variety of firms might execute.  In contrast with the resource based view (RBV) emphasis on things that other firms cannot imitate, the PBV examines publicly known, imitable activities, or practices amenable to transfer across firms.   



Professor Philip Bromiley
Title: “Enterprise Risk Management: Review, Critique, and Research Directions”
Co-author: M. McShane, A. Nair, and E. Rustambekov
Accepted at:
Long Range Planning
December 2013


Many regulators, rating agencies, executives, and academics have advocated a new approach to risk management: enterprise risk management (ERM).  ERM proposes the integrated management of all the risks an organization faces, which inherently requires alignment of risk management with corporate governance and strategy.  Academic research on ERM is still in its infancy with articles largely in accounting and finance journals, but rarely in management journals.  We argue that ERM offers an important new research domain for management scholars.  A critical review of ERM research allows us to identify limitations and gaps that management scholars are best equipped to address. The paper not only identifies how management scholars can contribute to ERM research, but also points out why ERM research (and practice) needs management research for its development. 


Professor Philip Bromiley
Title: Comoarison of Alternative Measures of Organizational Aspirations
Co-author: J.A. Harris
Accepted at:
Strateguc Management Journal
December 2013


Research on organizational aspirations has used various representations of firm-level aspirations, and based those representations on various performance measures.  To advance our understanding of the measurement of aspirations, we empirically compare three different aspiration models defined using six different performance measures to explain three different firm outcomes (financial misrepresentation, R&D spending, and income stream uncertainty).  The results moderately support a model with separate historical and social aspirations over a model of aspirations that systematically switches between the two.  The results strongly support both the separate and switching models over a model where aspirations constitute a weighted average of historical and social comparisons, the model associated most directly with Cyert and March’s original specification.  We discuss the implications of these results, and highlight directions for future research.


Professor Philip Bromiley
Title: Managers and Analysts: An Examinaton of Mutual Influence
Co-author: W. Washburn (Ph.D. alumnus)
Accepted at:
Academy of  Management Journal
December 2013


Securities analysts’ predictions of firm earnings per share constitute important performance targets for firms.  Firm managers attempt to both influence analysts’ targets and achieve the targets. We draw on the impression management literature to offer hypotheses regarding how firm performance relative to prior targets influences the impression management activities of issuing forecast guidance, having conference calls with analysts, and issuing firm press releases.  We also consider the influence of these impression management activities on subsequent analysts’ targets.  We test this dyadic representation of impression management activities using a longitudinal panel of large firms. Findings suggest managers take a variety of actions that vary with firm performance, and that some of those actions influence subsequent analyst targets under some conditions.




Professor Margarethe Wiersema
Title: “Executive Decision-Making: Linking Dynamic Managerial Capabilities to the Resource Portfolio and Strategic Outcomes.”
Co-author: Joe Beck
Accepted at: Journal of Leadership and Organizational Studies. 2013.  Vol. 20(4): 408-419.


To more completely understand the basis for firm performance differences, we need greater clarity on the drivers of differentiation in managerial strategic decision making, as well as on the impact these decisions have on the composition and configuration of the firm’s resource portfolio. In this article, we provide an integrative framework that illustrates how strategic leaders influence firm strategy and performance. Our model clarifies the role that dynamic managerial capabilities play in fashioning a unique bundle of resources for the firm, thus leading to differences in firm strategies and performance outcomes. The process is illustrated by examples drawn from industry.



Professor Margarethe Wiersema
Title: “Industry Divestiture Waves: How a Firm's Position Influences Investor Returns.”
Co-author: Matthias Brauer
Accepted at: Academy of Management Journal. 2012.  Vol. 55: 1472-1492.


Because of the “opaque” nature of divestitures, investors face considerable uncertainty in evaluating divestiture decisions and thus may look to a firm’s social context, defined in terms of the pervasiveness of divestiture activity in its industry, to infer the quality of such a decision. Specifically, we propose that a firm’s position in an industry divestiture wave conveys information about whether or not managers are imitating their industry peers, which in turn will influence how investors perceive and assess the quality of the decision and its likely performance consequences. Supporting this theoretical argument, we find that the relationship between divestiture position and stock market returns exhibits a U-shaped pattern, with divestitures that occur at the peak of an industry divestiture wave generating the lowest stock market returns. We also find that industry characteristics (e.g., munificence) reinforce the effect of position in wave on investor response. Our study is the first to incorporate the role of a firm’s social context, assessed in terms of the pervasiveness of an activity, as an important factor that influences how investors perceive and evaluate divestiture decisions.


Professor Margarethe Wiersema
Title: “Executive Turnover in the Stock Option Backdating Wave: The Impact of Social Context.”
Co-author: Yan Zhang
Accepted at: Strategic Management Journal. 2012.  Vol. 34: 590-609.


While boards are known to react to corporate misconduct by removing the executives responsible, little is known about whether the board’s response is shaped by the firm’s social context. Using the 2006 stock option backdating scandal, in which firms manipulated stock option grant dates, we examine the impact of two dimensions of social context—the pervasiveness of the misconduct and the media attention to the misconduct. We find that firms implicated later in the backdating scandal are less likely to experience executive turnover than those implicated earlier. We also find that the amount of media attention to backdating at the time a firm is implicated in the
scandal increases the likelihood that the firm experiences executive turnover.


Professor Philip Bromiley
Title: “Comparing Aspiration Models: The Role of Selective Attention”
Co-author: Washburn, M (PhD alumnus)
Accepted at: The Journal of Management Studies

January 2012

For many years, scholars have used a variety of models to measure organizational aspirations, but these alternative measures reflect differing assumptions about the decision-making processes determining aspiration levels. This study begins by examining some of the implications of the aspiration models in use. It then extends the theoretical model of aspiration levels from the behavioral theory of the firm to incorporate varying attention, another fundamental concept from the theory. Finally, it uses direct aspiration measures on the sales performance of retailers in a large automotive manufacturer to assess the alternative theories by comparing existing models with one that incorporates varying attention. We find support for a model where the importance of the factors influencing aspiration levels varies with the level of past firm performance relative to industry performance. Thus, the varying attention so central to the behavioral theory of the firm influences the formulation of aspirations.



Professor Margarethe Wiersema
Title: “CEO Dismissal: The Role of Investment Analysts.”
Co-author: Yan Zhang
Accepted at: Strategic Management Journal. 2011.  Vol. 32: 1161-1182.


"CEO Dismissal: The Role of Investment Analysts” is forthcoming in Strategic Management Journal, the top academic journal in the field of strategic management. My co-author is Yan Zhang, a professor in strategy at Rice University in Houston, Texas. In this study, we propose that investment analyst stock recommendations can affect a board’s decision to dismiss the firm’s CEO. As legitimate third party evaluators of the firm and its leadership, we propose that investment analysts provide certification as to the CEO’s ability, or lack thereof, and thus help reduce the ambiguity associated with the board’s evaluation of the CEO’s efficacy. Using panel data on S&P 500 companies for the 2000-2005 period, we find that negative analyst recommendations result in a higher probability of CEO dismissal.



Professor Margarethe Wiersema
Title: “The Relationship between International Diversification and Firm Performance: Why it Remains a Puzzle”
Co-author: Harry P. Bowen
Accepted at: Global Strategy Journal

June 2011

Despite a wealth of empirical research, whether and how international diversification impacts firm performance remains one of the major unresolved research questions in the fields of strategy and international business. We propose that the lack of consensus about the nature of the international diversification–firm performance relationship results from a failure to fully grasp this complex phenomenon. Using data on international trade flows, we provide a more comprehensive perspective on the phenomenon of international diversification that illustrates that the geographic scope of U.S. companies increasingly reflects managers’ decisions about the geographical dispersion of their company’s value chain, decisions that go beyond simply deciding where to sell a firm’s products or services. By providing a more comprehensive perspective on the phenomenon of international diversification, we hope to motivate a conceptualization of international diversification that reflects the full range of decisions that define the geographic scope of a firm. Ultimately, our analysis is meant to highlight that finding an answer to one of the major unresolved research questions in the international business and strategy fields—how a firm’s international diversification impacts its performance—will require the adoption of new approaches to the conceptualization and measurement of the strategies that determine the geographic scope of a firm.



Professor Philip Bromiley
Title: “Explaining Temporal Orientation: Evidence from the Durability of Firms’ Capital Investments”
Co-authors: Souder, D.
Accepted at: Strategic Management Journal

January 2011

In contrast to broad generalizations about the short-termism of managers, this paper explains changes in the temporal orientation of specific firms over time, based on performance relative to aspirations and top management team incentives.  We gain empirical traction on temporal orientation by measuring the durability of acquired property, plant, and equipment (asset durability) from reported data on depreciation expense.  Consistent with predictions, we find that performance relative to aspirations positively influences asset durability.  Surprisingly, we find no evidence that stock-based compensation produces the same effect.  Instead, we find stock-based compensation lowers asset durability.


Professor Philip Bromiley
Title: “Management Theory Applications of Prospect Theory: Accomplishments, Challenges, and Opportunities”
Co-authors: Holmes, M., Devers, C. E., Holcomb, T. and McGuire, J. J.
Accepted at: Journal of Management

January 2011

We review management research drawing on prospect theory, focusing primarily on studies in strategic management and organizational behavior/human resource management. These studies have made valuable contributions to several prominent research streams. However, they commonly underutilize or misinterpret central arguments from prospect theory. Further, they illustrate that applying prospect theory in organizational settings poses several theoretical and methodological challenges. Thus, we review these studies, critically analyze them, and make suggestions to enrich future work.



Professor Philip Bromiley
Title: “Cost Reduction vs. Innovative Search in R&D”
Co-authors: Washburn, M. (PhD Alumnus)
Accepted at: Journal of Strategy and Management

January 2011

The behavioral theory of the firm predicts that poor performance relative to aspiration levels leads to search for ways to raise performance over aspirations.  Most researchers have assumed search leads to risk-taking or innovation.  However, firms might search for ways to raise performance without incurring additional risk, such as reducing expenses.  We compare the two models of search using data on Research and Development (R&D) spending.  The results generally support the cost cutting argument; R&D spending increases monotonically with performance relative to social aspirations.  These results suggest researchers need to consider searches that emphasize cost reduction, as well as searches that emphasize innovation. 



Professor Philip Bromiley
Title: “Looking at Prospect Theory” 
Accepted at: Strategic Management Journal
July, 2010

This paper offers a substantial revision of the implications strategy scholars have derived from prospect theory (PT).  It demonstrates that the theory’s predictions differ dramatically from what strategy scholars have inferred.  PT’s value function predicts negative risk-return associations for high performers and positive for low performers, directly contrary to the strategy literature.  In addition, PT’s isolation assumption means most firm choices should appear as mixed gambles.  Prior PT-based theorizing in strategy implicitly assumed that the firm faced unmixed gambles.  Finally, it demonstrates that PT does not make the general predictions most strategy researchers have assumed, but rather PT’s predictions depend on a full range of parametric and choice characteristics that strategy scholars have ignored. 


Professor Yu Zhang
Title: “Earnings Pressure and Competitive Behavior: Evidence from the U.S. Electricity Industry”
Co-authors: Javier Gimeno
Accepted at: The Academy of Management Journal

April 2010

This study examines the effect of earnings pressure, the tension felt by management to meet or beat analysts’ earnings forecasts, on firms’ behavior in oligopolistic output competition. We argue that firms whose management experiences earnings pressure seek to increase current profits to meet analysts’ forecasts by exploiting market power opportunities and tightening output, even though this could encourage rival output expansion. Using data from the US electricity generation industry, we found that firms facing earnings pressure tended to restrict output in markets where market structure and competitor characteristics were favorable for the exercise of market power, while their competitors tended to increase output in those markets.



Professor Philip Bromiley
Title: “Looking at Prospect Theory”
Accepted at: Strategic Management Journal

January 2010

By carefully examining the implications of Tversky & Kahneman’s Prospect Theory, this paper demonstrates that, contrary to frequent assumptions in the literature, the theory makes few predictions until all its conditions are fully specified.  Furthermore, the often-mentioned “risk aversion above and risk seeking below” the reference point are not generally correct, and, indeed, most choices firms face involve both positive and negative outcomes making the “all above” or “all below” results irrelevant. Finally, the theory’s probability weighting function, which has often been ignored, significantly influences the theory’s predictions.



Professor David Obstfeld
Title: “Creative projects: A less-routine approach toward getting new things done”                             
Accepted at: Organization Science

May 2009

This paper presents a framework for action that accounts for both how organizations get routine things done and pursue markedly new things through “creative projects.” Based on this framework, organizational routines and creative projects are viewed as trajectories occurring along a continuum of interdependent action differing in degree of repetitiveness, not in kind; functionally different, but sharing the same representational space. An ethnographic case study of an automotive prototype purchasing process and two initiatives to redesign that process is used to compare an organizational routine with creative projects occurring within the same organizational setting, and to further explicate the framework. Case analysis reveals how projection and planning (the ostensive aspect), as well as combinatorial action, knowledge articulation, and contingency management (the performative aspect), unfold differentially in organizational routines and creative projects. This paper contributes to our understanding of different forms of organizational change and provides a framework to examine the role of non-routine organizing at several levels of organizational analysis.



Professor Philip Bromiley
Title: “A Prospect Theory Model of Resource Allocation”               
Accepted at: Decision Analysis
April 2009
Many papers in organization theory and strategy use prospect theory, but few derive their hypotheses from prospect theory’s formal model. This paper develops a prospect theory model of resource allocation under risk where projects have both positive and negative adjusted payoffs. The model assumes consistent value (rather than profit) maximizing behavior and demonstrates how resources, risk propensity, and reference levels interact to determine allocations to risky projects. The analysis shows that prospect theory's parameters interact in complex ways to influence risk-taking which makes simple predictions difficult. Overall, loss aversion and the reference point dominate the results with curvature of the value function playing a secondary role and the maximum risk aversion occurring for firms near their reference points, not for firms above their reference points.



Professor Margarethe Wiersema
Title: “The Use of Limited Dependent Variable Techniques in Strategy Research: Issues and Methods”    
Accepted at: Strategic Management Journal
Co-authors: Harry P. Bowen
March 2009
Strategy researchers are increasingly turning their attention from examining the impact of strategic choices on firm performance to examining the factors that determine strategic choices at the firm level.  This shift of research orientation has meant that researchers are increasingly faced with a limited dependent variable that takes a limited number of usually discrete values, for which methods such as Logit or Probit are required. Despite their growing popularity, there appears to be widespread problems in the analysis of models using limited dependent variables. The purpose of this paper is to augment general guidelines with a more pragmatic approach for utilized these techniques. Toward this goal, this paper first considers the research design issue of when a limited dependent variable model is appropriate. It then presents and illustrates the essential methods for analyzing and interpreting the results from these models via simple examples that use the binary Logit model - the most common limited dependent variable model used in the strategy literature. In taking a pragmatic approach, this paper complements and contributes to the growing stream of articles in the strategy literature that highlight general methodological and statistical issues and, more specifically, recent papers that have raised awareness of key problems and offered general guidelines to foster the correct use of limited dependent variable methods.



Professor Margarethe Wiersema
Title: “Stock Market Reaction to CEO Certification: The Signaling Role of CEO Background”     
Accepted at: Strategic Management Journal
Co-authors: Anthea Zhang
March 2009
As a direct result of the corporate scandals that started with Enron and led to general unrest in the financial markets, the Securities and Exchange Commission (SEC) required chief executive officers (CEOs) and chief financial officers (CFOs) of large publicly traded companies with revenues greater than $1.2 billion to certify their financial statements by August 14th of 2002. We utilize the SEC ruling to define a natural experiment that allows us to investigate the signaling role of the characteristics of the CEO to investors. Since it is not possible to fully ascertain the truthfulness of the firm’s financial statements from the act of CEO certification, we utilize market signaling theory to propose that attributes of the CEO send important signals to the investment community as to the credibility of the CEO certification and thus the quality of the firm’s financial statements, which in turn impact the stock market reaction to the CEO certification. Consistent with prior research that has found that investors utilize attributes of the firm’s top management team to differentiate the quality of IPOs, there was a significant positive response by the stock market to CEO certification for firms where the CEO had larger shareholdings and held a greater number of external directorships.Results of this study also show there was a significant negative response by the stock market to CEO certification for firms where the CEO was associated with his/her company’s prior financial restatements (i.e., restatements were filed during the CEO’s tenure) suggesting that these certifications were less trustworthy to investors. Our investigation contributes to upper echelon research by examining the signaling role of the characteristics of the CEO in affecting investors’ response to his/her actions.




Professor Yan Gong
Title: “Vicarious learning and inferential accuracy in adoption processes”
Accepted at: Academy of Management Review
Co-author(s): Ann Terlaak, Assistant Professor, UW-Madison

November 2008
We develop a model of inferential vicarious learning that explicates how firms can learn whether to adopt a practice whose value varies across organizations. We first theorize how firms can infer this variation from samples of adopters, nonadopters, abandoners, and nonabandoners. Surprisingly, incomplete samples may allow more accurate inferences than complete ones. We then propose how firms, equipped with an understanding of the variation, can select referent organizations that differ from those identified in previous research.