Managerial Risk Taking in Diversified Firms: An Evolutionary Perspective

The degree of risk taking by lower level (division) managers is expected to vary depending upon the extent and type of diversification. Limited diversification, when coupled with M-form adoption and decentralization, induces managerial risk taking. Notwithstanding, the control system elaborations (e.g., strategic business unit [SBU] structures) to facilitate information processing as firms increase diversification, extensively diversified firms reach limits such that control loss reduces managerial risk taking. Ultimately, this control loss may result in poor relative performance thereby triggering a threat of takeover. The threat of takeover creates incentives for restructuring and more focused diversification. Firms that reduce their diversified scope through restructuring may induce managerial risk taking. Thus, diversified firms experience periods that induce and other periods that reduce division manager risk taking depending on diversification and associated control system attributes.