The Fallacy of 'Only the Strong Survive': The Effects of Extrinsic Motivation on the Persistence Decisions of Underperforming Firms

Abstract

Under-performing firms persist even though existing theoretical perspectives indicate that they should be selected out of the market. Building upon threshold theory [Gimeno, J., Folta, T., Cooper, A., Woo, C., 1997. Survival of the fittest? Entrepreneurial human capital and the persistence of underperforming firms. Administrative Science Quarterly 42, 750-783.] and using Staw's [Staw, B.M., 1981. The escalation of commitment to a course of action. Academy of Management Review 6 (4), 577-587.] theoretical model of commitment to a course of action, we explore and test the factors that lead entrepreneurs to persist with under-performing firms. We found environmental munificence, personal investment, personal options, previous organizational success, and perceived collective efficacy impact the decision to persist with an under-performing firm. In addition, extrinsic motivation moderates those relationships. This research adds to the growing literature on highly persistent, under-performing firms and complements and extends threshold theory.