Abstract:

How commitment escalation is realized in corporate behaviour is under-explored, with research to date largely experimental. These experimental studies find that the availability of investment options diminishes the impact of sunk costs, leading to more rapid exits. In contrast, empirical studies in finance and strategy identify a corporate propensity to reallocate resources from high-performing to underperforming business units in multi-business firms, suggesting a tendency to recover loss units rather than exit. This study not only highlights this gap, but also attempts to fill this gap by analyzing the business units of S&P 1500 firms, comparing the length of the period between business exit and recovery. It finds that a greater number of units does facilitate commitment de-escalation, even more rapidly than the anticipated recovery time. Additionally, the role of asset sales is considered to understand the endogenous nature of loss units, providing a nuanced perspective of commitment escalation at the business level.

Please choose your submission type: Full Paper

Primary Track: Strategy

Keywords: strategy;corporate strategy

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Dr. Ikboljon Kasimov