The behavioral theory of the (community‐oriented) firm: The differing response of community‐oriented firms to performance relative to aspirations

• DOI: http://doi.org/10.1002/smj.3123
• Published date: 01 June 2020
• Author: Philip Bromiley,Stephen J. Smulowitz,Horacio E. Rousseau
• Date: 01 June 2020

RESEARCH ARTICLE

The behavioral theory of the (community-

oriented) firm: The differing response of

community-oriented firms to performance

relative to aspirations

Stephen J. Smulowitz

1

| Horacio E. Rousseau

2

| Philip Bromiley

3

1

IMD Global Board Center, Lausanne, Switzerland

2

College of Business, Florida State University, Tallahassee, Florida

3

The Paul Merage School of Business, University of California, Irvine, Irvine, California

Correspondence

Stephen J. Smulowitz, IMD Global Board

Center, Ch. de Bellerive 23, P.O. Box

915, CH-1001 Lausanne, Switzerland.

Email: ssmulowi@gmail.com

Abstract

Research Summary: Combining insights from the

behavioral theory of the firm with sociological research

on local embeddedness, we propose that community-

oriented firms respond differently to performance rela-

tive to aspirations than noncommunity-oriented firms.

Community-oriented firms develop long-term relations

with local constituents and emphasize community goals.

This orientation should buffer them from the risk-

inducing effects of falling below financial aspirations,

and encourage them to pursue community goals more

intensely when exceeding financial aspirations. Using

U.S. bank data from 2005 to 2013, we find that commu-

nity orientation—exemplified by community banks—

attenuates the influence of performance below

aspirations on risk-taking, but amplifies the influence of

performance above aspirations on community invest-

ments such as small business loans. We discuss implica-

tions for a sociologi cally informed view of p erformance

feedback processes.

Managerial Summary: Relative to their size, locally

embedded community banks take less risk and make

more small business loans than do larger banks. We

Received: 13 February 2018 Revised: 11 November 2019 Accepted: 23 November 2019 Published on: 24 January 2020

DOI: 10.1002/smj.3123

Strat. Mgmt. J.. 2020;41:1023–1053. wileyonlinelibrary.com/journal/smj ©2020 John Wiley & Sons, Ltd. 1023

find that they also respond differently to performance

relative to aspirations than do noncommunity banks.

Specifically, while community-oriented banks increase

risk-taking when their performance is below aspira-

tions, they do so less intensely than larger banks. This is

because factors related to ownership and community

embeddedness make such banks more risk averse than

large banks. Also, performance above aspirations pro-

vides freedom of action, and community banks use that

freedom to increase small business lending. Such lend-

ing benefits the community and improves the business

environment in which the community bank operates

important secondary goals to community-embedded

firms.

KEYWORDS

aspirations, banks, behavioral theory of the firm, community

orientation, performance feedback, risk, small business loans

1|INTRODUCTION

Scholars in the behavioral theory of the firm (BTOF) tradition explain multiple firm behaviors

as responses to patterns of success or failure in their performance (Cyert & March, 1963;

March & Simon, 1958). Performance relative to aspirations (PRA)—both positive and

negative—can affect organizational actions in various ways. Performance below aspirations

triggers actions aimed at improving performance, such as increased risk-taking (Bromiley, 1991;

Lim & McCann, 2013), mergers and acquisitions (M&A) (Iyer & Miller, 2008), or new products

launches (Eggers & Suh, 2019), while performance above aspirations reduces those actions.

PRA also shapes firm action by altering the allocation of attention (March, 1989). Firms that

perform above aspirations direct energies toward unexploited opportunities (Zahra, 2005) or

sequentially attend to lower priority goals that decision makers might have previously over-

looked (Greve, 2008; Greve & Gaba, 2017).

Although changing firm behavior as a response to PRA represents a general phenomenon

(Bromiley, 2004; March, 1994), firms differ in how they interpret and react to this information.

Firm responses to PRA vary with firm governance arrangements, resources, and organizational

structures (Desai, 2015; Joseph, Klingebiel, & Wilson, 2016; Kuusela, Keil, & Maula, 2017).

Indeed, previous research has shown that a firm's entrepreneurial (Hoskisson, Chirico, Zyung, &

Gambeta, 2017; Naldi, Nordqvist, Sjöberg, & Wiklund, 2007), strategic (Audia, Locke, & Smith,

2000; Vissa, Greve, & Chen, 2010), or temporal (Bromiley & Souder, 2012) orientation can influ-

ence its response to PRA.

We build on this work to consider another key dimension of firm orientation, namely, com-

munity embeddedness. Relative to noncommunity-oriented firms, community-oriented firms

are more locally owned and managed, are smaller in size, operate within a limited geographic

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