Performance , firm size , and factory expansion PERFORMANCE , FIRM SIZE , AND FACTORY EXPANSION IN THE SHIPBUILDING INDUSTRY

Behavioral risk theory predicts that low performing firms will take greater risks, but threat rigidity theory predicts that low performing firms will be risk averse. We seek to resolve these conflicting predictions by extending the March-Shapira shifting-focus model of risk taking. Specifically, we predict that large firms will follow risk theory and small firms will follow threat rigidity theory because small firms are more focused on the threat of failure. Using data on the risky strategic action of factory expansion in Japanese shipbuilding firms, we find that when performance falls below the aspiration level, performance decreases induce risk aversion in small firms but not in large firms.