Performance Feedback and Risk Taking: The Moderating Effects of Governance Mechanisms in Korean Business Groups

Abstract

This study analyzes the moderating effects that performance feedback and governance mechanisms have on the risk-taking nature of firms based on the behavioral theory of the firm and the behavioral agency model (BAM). There are two main contingency factors that will be drawn upon: ownership identity and ownership structure. Firstly, this study will draw upon and analyze the ownership identity of family controlled firms compared to non-family controlled firms and secondly, it will analyze how positioning within the structure of ownership networks can influence the risk-taking behaviors of firms. This study will test these hypotheses with empirical data in the context of Korean business groups, which includes both of the aforementioned types of ownership and also shows the hierarchical ownership structure that controls a business group as a single entity. Drawing from the BAM, which assumes that boundedly rational decision makers are more loss averse than risk averse based on their problem framing, this study also analyzes decision-making by considering different time horizons to explain the different motivations of the controlling shareholders and the situation-dependent behaviors of family-owned management shown in prior studies. Given the different time horizons and motivations behind risk-taking, depending on ownership identity, the differences of discretionary power for group-level resource-sharing activities and the perception of whether positive or negative performance aspiration gaps have an influence further explain the risk-taking behaviors of affiliates. Therefore, this study first proposes that family ownership amplifies the increase in risk-taking behavior resulting from negative and positive performance aspiration gaps, and negative performance aspiration gaps have a greater effect than positive performance aspiration gaps. Secondly, due to the authority of ultimate leaders of both of family owner-managers and executive managers in controlling group-level resources, the centrality in ownership networks also has a great significance in pursuing their interests drawing from different roles and responsibilities imposed by the positioning. This vertical heterogeneity gives different motivations and capabilities for each affiliate's risk-taking propensity. Thus, this study also proposes that centrality intensifies negative relations between negative performance aspiration gaps and risk taking and also attenuates positive relations between positive performance aspiration gaps and risk taking. An analysis of Korean business-group affiliates largely supports these hypotheses. These findings imply that the relationship between performance feedback and corporate governance mechanisms, specifically family-owned management and ownership network centrality, play an important role in a firms risk-taking behavior.