Narrow‐Framing and Risk Preferences in Family and Non‐Family Firms

• Author: Hanqing “Chevy” Fang,Esra Memili,Linjia Tang,James J. Chrisman
• DOI: http://doi.org/10.1111/joms.12671
• Published date: 01 January 2021
• Date: 01 January 2021

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

Narrow-Framing and Risk Preferences in Family and

Non-Family Firms

Hanqing “Chevy” Fanga, Esra Memilib,

James J. Chrismanc,d and Linjia Tange

aMissouri University of Science and Technology; bUniversity of North Carolina at Greensboro; cMississippi

State University; dUniversity of Alberta; eZhejiang University of Technology

ABSTRACT Building upon prospect theory’s concept of narrow-framing, we explore family firms’

risk preferences across multiple decisions in corporate entrepreneurship. We argue that family

firms’ decisions are less likely to be narrowly framed (more likely to be made as a group rather

than in isolation) compared to non-family firms. Examining the interaction between two risky

decisions (internationalization and R&D investment) in two samples of publicly traded firms in

the USA and China confirms our hypotheses. Family firms appear more likely than non-family

firms to diversify risk when making multiple decisions concerning corporate entrepreneurship.

However, given inferior performance, risk taking across multiple decisions in family firms is posi-

tively related.

Keywords: corporate entrepreneurship, family business, narrow-framing, risk management

INTRODUCTION

Often studied at the firm level, scholars claim that risk is an inherent part of corpo-

rate entrepreneurship (Lumpkin and Dess, 1996; Zahra, 1991; Zahra and Covin, 1995),

through which firms might implement strategic renewal and performance turnaround

(Wiseman and Bromiley, 1996) or, alternatively, face substantial monetary losses (Sitkin

and Pable, 1992). In recent years, there has been increased scholarly attention to the

risk preferences in family owned and -managed firms within the domain of corporate

entrepreneurship (Chrisman and Patel, 2012; Gómez-Mejía et al., 2007, 2014). Indeed,

the literature recognizes that family business represents a unique type of organization in

Journal of Man agement Studi es 58:1 January 2021

doi:10. 1111/j om s .12 671

Address for reprints: Hanqing “Chevy” Fang, Department of Business and Information Technology, Missouri

University of Science and Technology, 101 Fulton Hall, 301 W. 14th St., Rolla, MO 65409, USA (fangha@

mst.edu).

202 H. Fang et al.

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

engaging in and managing corporate entrepreneurship (Brumana et al., 2017; Minola

et al., 2016). In particular, research shows that family firms tend to be loss and usually,

risk averse, as reflected in lower R&D intensity (Chrisman and Patel, 2012; Gomez-

Mejia et al., 2014), diversification (Gómez-Mejía et al., 2010), and internationalization

than non-family firms (Alessandri et al., 2018a; Fang et al., 2018). Nonetheless, family

business scholars also note that risk preferences in family firms might also be subject to

preference reversals (e.g., De Massis et al., 2020; Strike et al., 2015). Moreover, studies

generally show that inferior past performance may prompt firms to take greater risk (e.g.,

Park, 2002). In this case, family firms might turn from risk aversion to risk taking, poten-

tially even more so than non-family competitors in order to enhance firm performance

and preserve the owning family’s socioemotional wealth (SEW), which represents their

non-economic endowment in the business (Chrisman and Patel, 2012; Gomez-Mejia et

al., 2007; Kotlar et al., 2014).

While the prominent stream of research on family firm risk preference has yielded

fruitful insights, researchers often treat risky decisions individually. Nonetheless, as Miller

and Bromiley (1990) and others (Bromiley et al., 2015, 2017; Palmer and Wiseman,

1999; Ruefli et al., 1999) highlight, strategic decisions embedded in corporate entrepre-

neurship might have different types and levels of risks. Thus, conceptualizing risk pref-

erence based on a single type of decision might fall short in reflecting the complexity of

corporate entrepreneurship in organizations and neglect the fact that organizations can

manage their aggregate level of risk by combining high and low risk activities (Amit and

Livnat, 1988), or by designing integrative systems that coordinate multiple risk-taking

activities (Lawrence and Lorsch, 1969).

Building upon the narrow-framing perspective discussed in prospect theory (Kahneman

and Lovallo, 1993; Kahneman, 2003), we argue that compared to family firms, risky

decisions in non-family firms are more likely to be narrowly framed, meaning that risk

decisions in non-family firms are more likely to be made in isolation rather than as a

group because decision-makers are apt to be evaluated on the short-term results of each

decision and have limited discretion to deviate from short-term profit maximization ob-

jectives. By contrast, decision-makers in family firms should have greater discretion to

consider decisions in combination and from a long-term perspective. By drawing upon

existing risk preference and corporate entrepreneurship studies in the family business

literature, we further argue that given the tendencies for risk aversion and preference

reversal observed in family firms, the consideration of decisions as a g roup are likely to

be influenced by these tendencies.

We test these premises by exploring the interactions among two risky dimensions – R&D

investment and internationalization – that are widely studied in the corporate entrepre-

neurship and family business literatures (see De Massis et al., 2013; Pukall and Calabró,

2014). Using two samples of publicly traded firms (US sample, S&P 1500 manufac-

turing firms from 1996 to 2013; China sample, Second-board Market from 2012 to 2017),

we find a negative relationship between internationalization and R&D investments in

family firms. Nonetheless, when facing inferior performance, the relationship between

internationalization and R&D investments is positive in family firms. In comparison,

in non-family firms, the two risky decisions seem to be made in isolation. We conclude

Narrow-Framing and Risk Preferences in Family and Non-Family Firms 203

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

that risky decisions in family firms are more likely to be broadly framed than they are in

non-family firms where decisions are more likely to be narrowly framed.

This study contributes to the management field, particularly the family business and

the corporate entrepreneurship literatures, in several ways. First, this study builds on

prior work to explore how family firms manage multiple risky decisions rather than a

single risky decision. By combining the concept of ‘narrow-framing’ and the family busi-

ness risk preference and corporate entrepreneurship literatures, this study adds to the

understanding of risk preferences in family firms and suggests new ways of exploring the

topic. Second, this study adds to knowledge on strategic decision-making in family firms

(Chrisman et al., 2016). Our findings suggest that, unlike non-family firms, strategic de-

cisions in family firms are more likely to be broadly framed. Hence, our findings suggest

that family firms’ corporate entrepreneurship in general and risky decisions in particu-

lar cannot be fully understood without considering the portfolio of risk decisions being

made. This study also has important implications for corporate entrepreneurship in fam-

ily firms. If indeed family firms are less vulnerable to the problem of narrow-framing,

then family firm decision-makers might be more discriminating in their management

of new venture portfolios than non-family firms and pursue a more balanced approach

to risk-taking when performance meets (or exceeds) expectations and a more extreme

approach in risk seeking when performance falls below aspirations. Thus, future work in

family business should consider how corporate entrepreneurship fits into a portfolio of

risky decisions, since focusing on a single set of preferences and a single risk dimension

(e.g., R&D investment) might hide important nuances in entrepreneurial behaviour.

THEORETICAL FRAMEWORK

Multiple Risk Decisions in Corporate Entrepreneurship

The investigation of the role of risk in corporate entrepreneurship has been gaining

impetus (Bromiley, 1991; Bromiley et al., 2017; Miller and Bromiley, 1990) and the liter-

ature has been drawing attention to the various types and sources of risk that organiza-

tional decision-makers need to face (Palmer and Wiseman, 1999; Ruefli et al., 1999). For

instance, Bromiley et al. (2015, p. 269) note that, ‘executives face diverse risks including

market risk, competitive risk, supply chain risk, political risk, and exchange rate risk’ and

‘a single strategic decision may involve multiple types of risk that occur at different times

during execution’.

In this article, we define risk as the probability of adverse outcomes in strategic choices

involving the allocation of resources. This definition is aligned with Palmer and Wiseman

(1999)’s definition of managerial risk, as we focus on risks that organizations might be ex-

posed to stemming from what they choose to do. By contrast, we are not focusing on risks

that arise from externalities that are beyond the control of organization’s decision-mak-

ers such as risks associated with recession, currency fluctuations, so forth.

Studies in corporate entrepreneurship and family business tend to focus on a single

risky decision such as R&D investments (e.g., Chrisman and Patel, 2012; Gómez-Mejía

et al., 2014) or international diversification (Alessandri et al., 2018a; Lin, 2012). While