Performance Shortfalls, Response Directions, and Belief in the Effectiveness of Responses

The problemistic search literature has long sought to understand which specific responses firms adopt when addressing performance shortfalls. Extant studies typically consider a few responses and focus on established decision rules to examine search directions. In so doing, they implicitly assume that all responses considered are workable solutions to performance shortfalls. In contrast, we argue that variations in decision-makers’ beliefs about the effectiveness of particular responses in improving firm performance play an important role. These beliefs, as well as evidence supporting them, determine which specific responses firms adopt. To test this argument, we focus on two types of search solutions represented by R&D intensity and philanthropic donation intensity. Based on 2009–2018 data collected from publicly listed Chinese firms, we find that, when decision-makers agree on the effectiveness of R&D, the positive relationship between performance shortfalls and R&D intensity strengthens; whereas when they agree on the effectiveness of corporate social responsibility (CSR), the negative relationship between performance shortfalls and donation intensity weakens. The effects of shared beliefs on the effectiveness of R&D and CSR are stronger when they are supported by relevant evidence, i.e., when there is a stronger correlation between R&D or CSR on the one hand and firm performance on the other.