Making sense of rare disruptive events: Firm growth across recurrent macroeconomic shocks

Research Seminars
Academic Areas Strategy
Abhirup Chakrabarti, Associate Professor & Distinguished Faculty Fellow of Strategy, Smith School of Business,Queen's University Associate Professor & Distinguished Faculty Fellow of Strategy from Smith School of Business,Queen's University 
October 1, 2018 | 10:30 AM - 12:00 PM | Monday
Yaman, Hyderabad, Hyderabad, India
Open to Public
When rare and extreme events recur, firms draw upon interpretations of the accountability and reliability of their prior experience to guide decisions. We show that such interpretations can cause firms to validate risky choices during shocks. We study the firm level decision to grow across recurrent macroeconomic shocks, considering that growth during shocks risks disruption and failure because of reduced access to capital and markets. Using a sample of firms that navigated three macroeconomic shocks in Asia, we find that firms exhibited little consistency in their growth strategies, risk orientation, and performance across these shocks. Yet, their experience in a previous shock systematically influenced how they responded to the focal shock. Results suggest that firms are more likely to choose a risky strategy in response to an environmental shock if they have not previously attempted the strategy or if they link the strategy to improved performance in a previous shock. Our study suggests that while organizational interpretation helps explain how firms can correctly apply learning, it can also explain deviations and inappropriate choices.