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Title: The Moderating Effect of Goal Specificity on Escalation of Commitment in Entrepreneurial Firm Exit

Authors:Susanna Khavul, University of Texas at Arlington, Department of Management

Abstract:

Most high technology start-up firms eventually exit their markets, but many do so only after incurring substantial losses. While much is known about market entry decisions, very little is known about the decision to exit. Behavioral research suggests that sunk costs may create a psychological bias that causes escalation of commitment and persistence to a failing course of action (e.g. continuing in an unprofitable business). We hypothesize and show that goal specificity is an effective de-biasing strategy to curb escalation of commitment. Having specific goals negatively moderates the relationship between sunk costs and escalation of commitment. We use multiple methods that combine observational and experimental data in the context of entrepreneurial exit. Our study clearly underscores that the psychological underpinnings of strategic management have important theoretical implications in explaining decisions about when to exit a failing business. Our findings deliver an explicit message that managers can improve their strategic decision-making by setting specific goals.