Betting the farm : the effect of prior performance on the framing of strategic risk decisions

The purpose of this study was to address the effects of prior performance on strategic risk decisions of the firm. Strategy researchers have traditionally sought to focus on the impacts of strategic risk decisions. such asResearch and Development, Diversification, Credit Risk,and Financial Risk, on performance. The findings have been inconclusive and many times contradictory. Thisresearch is based on the premise that the prior performance of the firm and the outcomes associated with the risk decision involved will effect decisions related to the risk. Therefore, this dissertation seeks to provide insight into the question what is the nature of the relationship between the prior performance of firms and their strategic risk decisions?Using a sample comprised of 72 firms (40 juice processors and 32 cocoa processors) this study collected firm performance data from 1993-1996 (Return on Assets) ,hedging ratio (1997), and the effect of prior hedging on ORA (1993-1996). The findings indicate that the prior performance was indeed positively associated with higher usage of risk-evasive mechanisms. While the hypothesized moderating effect of trend in performance was not found to be statistically significant, a significant direct effect was supported. Additionally, the prior performance of the risk-evasive mechanism showed weak support at best for a positive relationship. This is truly a comforting find for those who study and teach in the field of finance.