The behavioral theory of the (community-oriented) firm: The differing response of community-oriented firms to performance relative to aspirations

Abstract

Combining insights from the behavioral theory of the firm with sociological research on local embeddedness, we propose that community-oriented firms respond differently to performance relative to aspirations than noncommunity-oriented firms. Community-oriented firms develop long-term relations with local constituents and emphasize community goals. This orientation should buffer them from the risk-inducing effects of falling below financial aspirations, and encourage them to pursue community goals more intensely when exceeding financial aspirations. Using U.S. bank data from 2005 to 2013, we find that community orientation—exemplified by community banks—attenuates the influence of performance below aspirations on risk-taking, but amplifies the influence of performance above aspirations on community investments such as small business loans. We discuss implications for a sociologically informed view of performance feedback processes. Relative to their size, locally embedded community banks take less risk and make more small business loans than do larger banks. We find that they also respond differently to performance relative to aspirations than do noncommunity banks. Specifically, while community-oriented banks increase risk-taking when their performance is below aspirations, they do soless intenselythan larger banks. This is because factors related to ownership and community embeddedness make such banks more risk averse than large banks. Also, performance above aspirations provides freedom of action, and community banks use that freedom to increase small business lending. Such lending benefits the community and improves the business environment in which the community bank operates important secondary goals to community-embedded firms.