Performance Feedback and Innovative Search Strategies: An Integrative Perspective of Motivation and Capacity for Risk Taking

Abstract Innovative search is a critical component of strategic decision making, and its different dimensions convey various levels of risk. Prior research on the behavioural theory of the firm has focused on motivation logic or capacity logic to predict the effects of performance feedback on risk taking but has paid limited attention to their joint effects. To construct a comprehensive framework in the behavioural theory of the firm, we consider both motivation and capacity logic to analyse the impact of performance feedback on risk taking. We argue that underperformance feedback positively affects innovative search scope and that overperformance feedback entails a U‐shaped relationship with innovative search scope, while innovative search depth shows the opposite trend. Using a unique dataset consisting of 9,730 firm‐year observations of 2,102 Chinese listed firms from 2008 to 2018, we conduct fixed‐effect regression analyses to test our hypotheses and find support for most theoretical predictions. We also identify the boundary roles of environmental dynamism. This study contributes to the literature on the behavioural theory of the firm by predicting innovative search strategies using a consistent and integrative framework.