Performance feedback, performance prospects, and firm search behavior: the role of institutional settings

Official URL: https://dx.doi.org/10.1016/j.jbusres.2025.115630

The Behavioral Theory of the Firm (BTOF) posits that firms undertake R&D search when their current performance falls below their aspirations, reflecting a backward-looking driver of search, or when anticipated future performance is projected to fall short of targets, representing a forward-looking driver. However, little is known about how external contingencies influence the prominence of these search drivers. Drawing on the literature on institutions, we argue that financial systems in a country, a key aspect of firms’ institutional settings, influence the salience of forward- and backward-looking drivers by shaping firms’ temporal and cognitive orientations. Specifically, we propose that while firms in market-based financial systems are more responsive to performance expectations below targets, firms in bank-based financial systems are more responsive to performance below aspirations. We further argue that the influence of financial systems depends on firms’ slack resources and equity dependence. Our analyses on a sample of 3,908 manufacturing firms from 24 countries corroborate these hypotheses, stressing the central role of institutional settings in shaping firms’ R&D search behavior.