Performance Feedback and Financing Decisions: Exploring Complementarities Between TCE and BTF

In this paper we utilize insights from the behavioral theory of the firm (BTF) and transaction cost economics (TCE) to help illuminate the financing choices of poorly performing firms. As per BTF, search intensity increases as performance falls below aspirations. We argue that problem-driven search requires greater managerial discretion. TCE provides a comparative institutional perspective where modes of financing are compared based on their governance properties and informs us as to which governance regimes would be better suited to cases which require greater managerial discretion. Hence, in understanding the financing decisions that firms make, BTF and TCE provide complementary perspectives. BTF’s problem-driven search requires governance that is suited to facilitate managerial discretion and TCE tells us which modes of financing provide discretionary governance. Additionally, we also examine the impact of search intensity on modes of financing. Finally, financing modes that provide hybrid governance properties are examined by exploring heterogeneity in debt (market governance) and equity (hierarchical governance) financing modes.