Academy of Management Journal 2008, Vol. 51, No. 3, 476494.

A BEHAVIORAL THEORY OF FIRM GROWTH: SEQUENTIAL ATTENTION TO SIZE AND PERFORMANCE GOALS
HENRICH R. GREVE INSEAD
According to the behavioral theory of the firm, managers pay sequential attention to goals and apply aspiration levels to each goal. Although many goals have been proposed for organizations, research has so far concentrated on profitability. Here it is proposed that managers form an aspiration level for size through social comparison. This proposal leads to predictions on how performance and size goals jointly affect growth. Supporting this sequential attention hypothesis, evidence from the general insurance industry shows that firms grow more when they are below the aspiration level for size, especially when performance goals are satisfied.

Organizational researchers have long been interested in the determinants and consequences of organizational size (Kimberly, 1976), and many consequences of size are now well known. Internally, larger organizations have more elaborate structures for managing employees (Bridges & Villemez, 1991; Sutton & Dobbin, 1996), more bureaucratic decision making (Baker & Cullen, 1993; Kimberly, 1976), and greater inertia (Chen & Hambrick, 1995; Delacroix & Swaminathan, 1991). Externally, larger organizations enjoy greater market power (Boone, Carroll, & Witteloostuijn, 2004; Haveman, 1993b) and are more influential in the spread of innovations (Haunschild & Miner, 1997; Haveman, 1993a). The causes of organizational size have seen less investigation. One explanation is that production technologies constrain organizational sizes by making very small or very large organizations inefficient. Cost data support this size-efficiency relation at the establishment level (Edmunds, 1981; Gooding & Wagner, 1985), but it does not impose a tight constraint on organizational size because the inefficiencies associated with large establishment size can be overcome by operating multiple establish-

The article was greatly improved by comments from Phil Anderson, Pino Audia, Xavier Castaner, Vinit Desai, Rodolphe Durand, Avi Fiegenbaum, John Freeman, Javier Gimeno, Heather Haveman, Jim March, and seminar participants at the Haas School of Business, INSEAD, and HEC. Nandini Rajagopalan and three anonymous reviewers gave very helpful feedback. Research support from the Norwegian Research Council (project 161318/ V10) and the Norwegian School of Management BI is gratefully acknowledged. Hans-Christian Hustad and Anne Fossum provided valuable research assistance.
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ments (Scherer, Beckenstein, Kaufer, Murphy, & Bougeon-Massen, 1975) and the inefficiencies associated with small size can be countered by market differentiation (Carroll & Swaminathan, 2000). Another explanation, emphasizing top managers incentive to grow their organizations to gain greater prestige and job rewards (Berle & Means, 1965; Dalton & Kesner, 1985), has been applied to recent merger waves (Matsusaka, 1993; Palmer, Barber, Zhou, & Soysal, 1995). This explanation has lost some of its force in view of shareholder resistance against large and complex corporations (Davis, Diekmann, & Tinsley, 1994; Zuckerman, 2000), but it remains a potential account of why organizations grow to be very large. Here, a different explanation of organizational size is offered. Managers make decisions to expand or contract organizations and decisions on market participation that cause the expansion or contraction of the organizations. When the relation between organizational size and performance is not well known, they have to make such growth decisions without clear economic guidance. As a substitute, managers use an aspiration level, which is the smallest outcome that would be deemed satisfactory by the decision maker (Schneider, 1992: 1053). They form aspiration levels through social comparison (Festinger, 1954) with similar organizations, which are easily available and relevant sources of information for judging the firm size. Uncertainty triggers a need to make social comparisons to establish expectations of firm size, and these expectations affect aspirations for firm size because managers believe that the sizes of other firms contain information on what firm sizes other managers view as beneficial. Thus, social aspiration levels are created by the same social judgment

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processes that underlie mimetic adoption of innovations (DiMaggio & Powell, 1983; Strang & Soule, 1998) and convergence of strategies (Fiegenbaum & Thomas, 1995), and that affect behavior such as pursuit of mergers and acquisitions (Haunschild, 1993; Westphal, Seidel, & Stewart, 2001). Once an aspiration level for size has been set, failure to reach it triggers problemistic search (Cyert & March, 1963) that leads to attempts to grow. Growth decisions are not based solely on aspiration levels for size, however, but are also affected by aspiration levels on other organizational goal variables. First, managers implement many strategic changes in response to organizational performance that falls below the aspiration level (Bolton, 1993; Greve, 1998; Haleblian, Kim, & Rajagopalan, 2005; Lant, Milliken, & Batra, 1992), including expansion of production facilities (Audia & Greve, 2006; Greve, 2003b). Second, managers may have aspiration levels for the rate of organizational growth because they view growth as a form of performance (Armstrong & Collopy, 1996; Smith, Ferrier, & Grimm, 2001). When an organization pursues multiple goal variables, the question of how they interact comes to the fore. Here, three possible answers are examined. The first is a parsimonious model in which each goal has a separate and independent effect on managerial actions. The second is a sequential attention model in which high performance on one goal shifts attention toward the next, making organizations pursue one goal at a time. The third is an activation model in which low performance on one goal reinforces the effect of low performance on another, making organizations pursue one goal more vigorously when another is not met. These contrasting models rely on different assumptions about managerial attention, and a novel empirical test is needed to distinguish between them. This article develops theory on how aspiration levels for size and performance affect organizational revenue growth and tests the predictions on data from the general insurance industry. It makes four contributions. First, it introduces managerial aspiration levels for size as a mechanism affecting organizational growth. Such theory is important because it may inspire further research on the determinants of organizational size. Second, it develops the theory of how managerial attention shifts between goal variables. Such theory is needed because many organizational goals are related either through competition for attention, in which fulfillment of one goal makes another more salient, or through means-end relations, in which failure to fulfill one goal suggests a need to address underlying goals. Third, it presents a new approach

for testing hypotheses on how multiple goals affect a single outcome through interaction variables. Fourth, it presents new evidence on the causes of organizational revenue growth that facilitates evaluation of the claim that aspiration levels affect organizational growth.

THEORY AND HYPOTHESES Aspiration Levels and Problemistic Search According to the behavioral theory of the firm, organizational decision makers pursue multiple goals that result from internal bargaining, and comparisons of realized goal variables with aspiration levels determine organizational actions (Cyert & March, 1963: 26 43). In this theory, a goal consists of an aspiration level on a measurable organizational outcome (the goal variable). The realized outcome on a goal variable is often called performance, but for clarity it is useful to reserve that term for outcomes on goal variables that measure firm profitability. When an organization falls below the aspiration level of a goal variable, decision makers initiate problemistic search for actions that may produce outcomes above the aspiration level (Cyert & March, 1963: 120 123). In addition, researchers have later argued that failure to meet an aspiration level motivates decision makers to accept the risks inherent in changing their organization (Bromiley, 1991; Fiegenbaum & Thomas, 1988; Greve, 2003c; Lant et al., 1992). Thus, aspiration levels affect organizational change through adjustment of problemistic search and acceptance of risk. Aspiration levels are constructed from sources such as an organizations experience and its observation of other organizations (Cyert & March, 1963: 123124). Managers form reference groups of other organizations that they view as similar to theirs (Lant & Baum, 1995; Porac, Thomas, & BadenFuller, 1989), and they display greater awareness of the behaviors of organizations in these reference groups and greater likelihood of imitating them (Baum & Haveman, 1997; Fiegenbaum & Thomas, 1995; Porac, Thomas, Wilson, Paton, & Kanfer, 1995). Such comparisons are similar to the social comparison processes in which individuals compare themselves with reference groups of others who are similar on salient attributes (Festinger, 1954; Miller, 1982; Wood, 1989). Organizations are thought to have a wide range of goals, including profitability, sales, and production (Cyert & March, 1963: 40 43). Some goals are used to assess organizational performance, and others are introduced through the efforts of stakeholders and interest groups to persuade organizations to

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pursue their interests (Donaldson & Preston, 1995; Hoffman, 1999). Among the different variables representing the goals that organizations might pursue, profitability measures such as return on assets have received the most attention (Audia, Locke, & Smith, 2000; Bromiley, 1991; Greve, 2003a, 2003b; Lant et al., 1992; Miller & Chen, 2004). Studies on aspiration levels for research productivity and sales (Audia & Sorenson, 2001) and market share and status (Baum, Rowley, Shipilov, & Chuang, 2005) have, however, used other goal variables. Profitability goals are often tied to concrete managerial incentives, and they affect a managers value in the job market (Fama, 1980). In that respect, profitability goals for top managers are similar to goals that managers set for their subordinate workers and work groups, because such intraorganizational goals often have career consequences (Mezias, Chen, & Murphy, 2002). There is ample evidence that organization members seek to meet goals set by their managers (Locke & Latham, 1990). There is also ample evidence that individuals are more willing to accept risk in loss situations, such as falling below the aspiration level on a goal variable (Heath, Larrick, & Wu, 1999; Kahneman & Tversky, 1979; Kuehberger, 1998). In keeping with this theory, many studies have shown that profitability affects managerial risk taking and the likelihood of strategic changes (Audia et al., 2000; Fiegenbaum & Thomas, 1988; Greve, 2003a; Lant et al., 1992; Nickel & Rodriguez, 2002), which subsequently affect profitability (Audia et al., 2000; Bromiley, 1991). Although profitability goals are clearly important for explaining organizational behaviors and outcomes, it is worthwhile to also consider other organizational goals. Theoretically, the role of goals in directing the attention of decision makers becomes more important the more numerous the goals are, so it is a key research task to investigate whether other goals exist. Empirically, work showing that firms in the same strategic group become similar on measures reflecting resource allocation and market position (Fiegenbaum & Thomas, 1995) has suggested that managers also make social comparisons with respect to other organizational attributes. One reason to doubt whether goals other than profitability affect organizational behaviors is that many organizational goals do not have such clear career consequences as profitability. For example, intermediate goals such as production efficiency and defect rates have weaker relations to top manager career outcomes than final goals such as profitability, and organizational efforts to address problems such as pollution (Hoffman, 1999)

or homelessness (Dutton & Dukerich, 1991) have even less clear rewards. However, experimental work has shown that aspiration levels also guide behaviors related to goals that are not associated with rewards (Locke & Latham, 1990). Indeed, according to the behavioral theory of the firm, managers seek to meet aspiration levels on a broad range of goals to avoid struggle among constituencies with potentially conflicting goals (Cyert & March, 1963). Hence, it is fruitful to extend investigation of organizational behavior directed by goals that go beyond profitability. Size Goals Aspiration levels for organizational size are founded on managerial beliefs that size affects organizational efficiency or legitimacy. Organizational size is related to efficiency in many industries, and organizations gain legitimacy by appearing similar to other organizations, so both beliefs are plausible (Deephouse, 1996; DiMaggio & Powell, 1983; Edmunds, 1981; McNamara, Deephouse, & Luce, 2003). Size goals are important because of their potential influence on firm strategies. Problemistic search that results from falling below the aspiration level for organizational size triggers competitive moves to increase the growth rate and results in actual growth if competing firms do not counter them effectively. Firms can realize revenue growth through competitive attacks such as price reductions, product development, and sales campaigns (Smith, Ferrier, & Ndofor, 2001). Competitors fail to respond to such attacks because of indifference when an attack is on a peripheral market and because of risk aversion when they themselves are profitable (Chen & Hambrick, 1995; Chen & MacMillan, 1992; Hambrick, Cho, & Chen, 1996), and thus there are often opportunities for organizations to achieve growth if their managers are willing to take risks. Hence, revenue growth is expected to be more rapid the further an organization is below its aspiration level, all else being equal. The effect of size above an aspiration level should be considered separately. Researchers have generally assumed that problemistic search changes as a continuous function of performance level (Bromiley, 1991; Lant et al., 1992) and that the strength of the reaction varies depending on whether performance is above or below an organizations aspiration level (Greve, 1998). This treatment parallels the treatment of goals as reference points in individual psychology (Heath et al., 1999) and differs from the view that performance above and performance below aspiration level are separate constructs. Given this assumption, the main issue to

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address is whether the effect of size is the same above and below aspiration level. One scenario is that the effect of size above an organizations aspiration level is the reverse of that below, because managers adjust downwards toward the aspiration level. This scenario is unlikely because managers are aware of the flat region in the size-efficiency relation that allows organizations to grow larger than the minimum efficient size without incurring an efficiency penalty, so managers of organizations above their aspiration levels do not seek to shrink them. They are, however, in a gain situation and thus less willing to take risk (Kahneman & Tversky, 1979) and will only seek growth to the extent that profitability can be maintained. Thus, the size goal is less likely to be active in firms with size above aspiration level, so the relation between size and growth becomes weaker. The following predictions are made: Hypothesis 1. For firms below their aspiration level for size, firm size is negatively related to growth. Hypothesis 2. For firms above their aspiration level for size, the relation of firm size to growth is weaker than for firms below the aspiration level and not positive. Performance Goals Organizations respond to low performance by making a broad range of strategic and operational changes, including entering new market niches, acquiring resources, and increasing R&D and innovativeness (Audia et al., 2000; Audia & Greve, 2006; Bolton, 1993; Greve, 1998, 2003a; Hambrick & DAveni, 1988; Lant et al., 1992). Similarly, higher organizational growth can be a result of low performance because problemistic search leads to discovery of actions that can increase growth, and managers are more willing to accept the heightened risk of such actions. Acceptance of risk is important because competitive moves to increase growth can trigger retaliation from competitors and can also involve operational risks. For example, growing insurance firms need to be alert to the possibility that newly acquired customers are sloppy or malfeasant. Again, it is valuable to consider whether the effect will be the same above and below an organizations aspiration level. First, consider the satisficing argument that was applied to size in the previous section. Organizational size is subject to satisficing because efficiency and legitimacy do not justify a very large size, but goals for organizational performance do not have upward bounds. Also,

performance goals have clearer career rewards for managers than size goals because they produce internal rewards and increase the managers worth in the external job market. Thus, although managers have aspiration levels for performance goals as well as for size goals, there is less justification for positing that an organization pursues performance goals more weakly when it is above its aspiration level for performance. Instead, managers will be motivated to lock in high organizational performance by avoiding risky actions. Next, consider organizational inertia. Research on performance effects on organizational change has specified that organizational inertia reduces the reaction to performance that is below aspiration level (Greve, 1998, 2003a, 2003b). This theory has been applied to predictions about changed market niche, investments in production technology, and introductions of innovative product technologies, which are behaviors that alter a firms organizational core and thus are subject to inertial forces (Hannan & Freeman, 1984). Organizational size is not a part of the organizational core, and thus the inertia prediction does not apply to this outcome.1 Following these arguments, one concludes that performance is negatively related to growth and is not made nonlinear by shifting attention or organizational inertia, leading to: Hypothesis 3. Performance is negatively related to growth. Performance and Size Goal Interactions Having posited that both size and performance goals affect growth, I now consider interactions between these goals. Earlier work has addressed this issue in different ways. Some has investigated the effects of multiple goals side by side, as when accounting and stock market measures of profitability are used to predict risk taking (Miller & Chen, 2004). This approach treats the goals as alternative measures of the same construct, which is appropriate for closely related goals, but not for qualitatively different goals such as performance and size. Other work has included multiple goals in a single model, applying the usual regression assumption of additive effects. This work has shown that two goals can jointly influence a single outcome, as when goals for market share and network
1 However, some of the actions that organizations may take to initiate growth may affect the organizational core (such as entering new market niches), making differences in the reaction to performance above and below the aspiration level possible.

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status both affect network tie initiation (Baum et al., 2005), and that goals have a greater effect on more relevant outcomes, as when technological performance affects innovations but sales performance affects product introductions (Audia & Sorenson, 2001). This is a parsimonious approach for modeling different goals, and it should be preferred in the absence of good theoretical reasons to expect interactions between the goals. Here, some reasons to expect goal interactions exist. Work contrasting individual and organizational goals has shown effects of organizational goals (McNamara & Bromiley, 1997) but has also shown that individuals may have reactive responses that reverse the intended effects of organizational goals (McNamara, Moon, & Bromiley, 2002). One study showed that a self-enhancement bias makes individuals facing two divergent goals prone to accept the one they exceed, and thus to have a bias toward inaction (Audia & Brion, 2007). However, my study analyzing the effects of two different organizational aspiration levels yielded no interactions (Greve, 1998), and a study analyzing two different organizational goals indicated that failure to fulfill one was enough to increase risk taking (Baum et al., 2005). The sparse evidence suggests a need for further research. Here, two alternative interaction effects are proposed. The first is a sequential attention rule, stating that decision makers attend to one goal at a time and move on to the next goal when performance on the first is above the aspiration level (Cyert & March, 1963: 117119). Sequential attention is a form of quasi-resolution of conflict that lets decision makers treat different goals as constraints to be satisfied in some order of priority rather than as trade-offs that have to be weighed against each other. It reduces cognitive effort and political strife and thus yields easier, but possibly suboptimal, organizational decision making. When goals are attended to sequentially, fulfillment of an active goal shifts the attention to the next goal. The order in which goals are attended to is not uniform among organizations and over time but may differ according to the preferences of the dominant coalition of each organization (Cyert & March, 1963: 26 32). It is still reasonable to expect that goals closely associated with the survival of an organization, such as performance, will have high priority, and hence that size goals gain attention when performance goals are satisfied. The gain in attention to size goals may occur without a corresponding reduction in attention to performance goals, as it is possible for organizations to pursue multiple goals, unless a high-priority goal such as performance attracts all decision maker attention.

These arguments imply that size relative to aspiration level has a negative relation to growth regardless of performance level, but the relation is weaker, and possibly close to zero, when performance is below aspiration level. The prediction is: Hypothesis 4a (sequential attention). The (negative) effect of firm size on growth is weaker in firms with low performance than in firms with high performance. Sequential attention is not the only rule that has been proposed, however, and in the case of performance and size a plausible alternative hypothesis exists. Some goals are causally linked in goal hierarchies in such a way that fulfillment of one goal helps an actor fulfill the next (March & Simon, 1958). All else being equal, an organization below the efficient size for its type of business will have low performance and can improve its performance by growing to the efficient size. Revenue growth can increase efficiency in the short run by allowing a more optimal utilization of current production capacity and can justify acquisition of larger and more specialized production assets that increase efficiency in the long run (Penrose, 1959). Although such effects have been documented best in manufacturing industries (Scherer et al., 1975), efficient scale is also important in service industries such as insurance (Johnson, Flanigan, & Weisbart, 1981; Khaled, Adams, & Pickford, 2001). Service delivery is backed by a production system, consisting of physical assets and human resources, that has been designed for a given capacity, so it is reasonable for a manager of a service firm to also assume that size is related to performance and thus to activate size goals when performance is below aspiration level. As noted earlier, uncertainty about efficient size makes it difficult to directly assess whether growth will improve performance. Managers may make this judgment by using the efficiency logic in reverse: if an organization has high performance, then it probably has efficient size as well, but if it has low performance, then growth may be a solution. This formulation implies that the size-growth relation is stronger when performance is low, contrary to Hypothesis 4a, but it is negative in both the high and low performance range: Hypothesis 4b (size goal activation). The (negative) effect of firm size on growth is stronger for firms with low performance than for firms with high performance.

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DATA AND METHODOLOGY General Insurance Size is a potential goal variable for any industry, and especially one in which managers believe that it is consequential for efficiency or legitimacy, so investigation of size goals has broad generalizability. The data used here are from the Norwegian general insurance industry. General insurance means all forms of insurance except life insurance and is also referred to as property-liability insurance. Insurance firms take on customer risk for a fee, which they can do profitably by pooling the risk of many customers (Ehlrich & Becker, 1972; Venezian, 1984). Although sufficient revenue is essential for pooling risk, too much revenue is also problematic. A general insurance firm needs to economically gain customers, correctly price their risk, and monitor their behavior, which limits the efficient size. Pricing is made complicated by the adverse selection problem of bad risks seeking insurance while good risks stay away, and monitoring is needed because insured actors become less cautious (Rotschild & Stiglitz, 1976). The problems of economic customer acquisition, pricing, and monitoring operate both at the niche and the firm levels, and the industry has a mix of specialists that are large in their niche and generalists that are large overall, as well as firms that are large neither overall nor in their niche. Reinsurance is available as a financial mechanism for pooling risks over firms, so if a reinsurance firm prices its services cheaply, efficient pooling of risks can be obtained at small firm sizes (Phifer, 1996). Insurers thus have a complex task of choosing size and level of specialization in their product offerings. Investigations of the size-efficiency relation for insurance firms have shown that small firms have high costs, but also that growth above the average size can increase costs (Johnson et al., 1981; Khaled et al., 2001). In general insurance, increasing revenues through low prices is a possible but potentially costly strategy. Insurance differs from manufacturing in that most costs are incurred after sales; this characteristic blunts the short-term disincentive against winning market share by lowering prices. Also, because much of the production system used in insurance is easily scalable, such as staff for sales and claims processing, capacity constraints on growth are weak. Indeed, if indivisible assets such as sales outlets, expert damage assessors, and test facilities are underutilized, the incentive to grow is large. These factors make a deep pocket strategy

of growing through low prices a clear possibility in the insurance industry. The insurance industry has both joint stock companies and mutual firms, or mutuals. Mutuals do not distribute dividends from their profits but may instead build reserves or reduce their prices. Their lack of access to the equity market and their control by customer-owners constrains their growth. Mutuals with widely dispersed ownership closely resemble managerialist firms in control but lack the ability to fund rapid growth, which has led to many conversions of mutuals to joint stock companies in the United States (Viswanathan & Cummins, 2003). In Norway, tight control of mutuals by concentrated owners has been common, however, and demutualizations have not occurred. The mutuals in the data introduced a complication because these firms do not seek to maximize profitability, so the usual profitability measures of performance are not suitable for them. Instead of maximizing profitability, mutuals seek to minimize administrative costs and insurance losses (damages paid out). Of these, the latter is the largest cost component, and they are also important to insurance firms with a joint-stock company form. Thus, the loss ratio, defined as the proportion of own premiums paid out in damages, is used as a performance measure in the insurance industry (Viswanathan & Cummins, 2003). It is a reversecoded performance measure because managers seek to minimize losses. Data Sources Accounting data from general insurance firms in Norway operating between 1911 and 1996 were coded from the annual reports of the Norwegian Insurers association from 1912 (volume 1) through 1997 and were supplemented with data from firm annual reports. The accounting data were coded by one research assistant and checked by another. Data on economic conditions were obtained from the Norwegian Central Bureau of Statistics. The data have previously been used to examine competition and experience effects on firm survival (Greve & Rao, 2006). The data set contained 4,842 firm-year observations from 161 firms. An additional 96 firms existed in this time period but did not enter the analysis because of missing data. Many of the firms with missing data were short-lived, such as firms that offered maritime insurance during World War I and failed soon after it ended. Some observations were lost because of the lagging of all independent variables by a year and the use of an additional lag

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to construct the aspiration level for the loss ratio. One year of observations was lost because accounting data were not given for the year 1943. Size and Performance Variables Organizational size was the logarithm of own premiums, which equals total premiums minus premiums reinsured (i.e., sold to reinsurance firms or other direct insurers). Own premiums, the standard sales measure in the insurance industry, is nearly always reported in firm accounts. I took the logarithm of these values because individuals tend to think of size and growth on a scale of proportional differences, which corresponds to a logarithmic scale. With this scaling, a manager whose firm is 20 percent below the firms aspiration level for size experiences the same size shortfall regardless of the absolute size of the organization. I tested this assumption by also estimating models with a linear specification of own premiums, which showed poorer fit to the data than the logarithmic specification used in the analyses reported in the tables presented here. Prior research has suggested that organizational decision makers construct aspiration levels from organizational reference groups using multiple criteria (Fiegenbaum & Thomas, 1995; Porac & Thomas, 1990; Reger & Huff, 1993) and that market participation is particularly important for choosing members of a reference group (Clark & Montgomery, 1999). Despite these findings, studies on social aspiration levels have simply used the mean or median, which implies that all organizations are equally influential on a focal organization (e.g., Audia et al., 2000; Fiegenbaum & Thomas, 1988; Greve, 1998). One study showed that aspiration levels weighting firms by similarity gave stronger findings than those using the unweighted mean (Baum, Rowley, Shipilov, & Chuang, 2005), suggesting that similar organizations influence one another more than dissimilar organizations do. Accordingly, I adjusted the size of each sampled organization by subtracting a social aspiration level defined as a weighted average of the size of all other sampled firms. The formula for the weighting factor was w 1 w1 w2, where w1 equaled 1 if both firms had the same corporate form (joint-stock or mutual) and 0 otherwise, and w2 equaled the proportion of the focal firms market niches in which the other firm was represented. This weighting let corporate form and market niche overlap affect similarity judgments in such a way that a maximally similar firm (same form and complete niche overlap) had triple the weight of a maximally dif-

ferent firm (different form and no niche overlap). To verify the weights, I tried smaller and higher values of w1 and w2. This procedure yielded equally good fit to the data for small changes and poorer fit for larger changes in either direction, suggesting that the chosen weights were optimal.2 The difference between actual size and the aspiration level for size was entered as a spline specification (Greene, 1993: 235238), which means that separate variables were entered when size was above aspiration level and when it was below. Performance was operationalized as the loss ratio, which equals the losses on own premiums divided by own premiums. In preliminary analyses, various aspiration levels were entered, and an aspiration level equal to last years loss ratio was found to have good fit, so I adjusted the loss ratio for the aspiration level by subtracting the previousyear loss ratio and included this value as loss ratio increase. Previous work has also used aspiration levels formed from past performance levels but often shown effects of multiple years of past performance (Greve, 1998; Lant, 1992; Mezias et al., 2002). I also included an indicator variable set to 1 when the loss ratio was higher than the prior years. This variable was the main effect for the interaction variables used to test whether the reactions to size were different when performance was below the aspiration level (i.e., losses were increasing). Control Variables Initially, a broad range of economic indicators were considered for inclusion as control variables, as such variables affect insurance both directly, through the ability of firms to have insurance, and indirectly, through the ability of employees to have

In preliminary runs, approaches that only considered one weighting criterion were also used: These used (1) specialist or generalist organization, (2) mutual or stock firm, (3) and multimarket contact. Other runs used (4) the size of the nearest-sized firm, (5) the unweighted mean, and (6) the median size of all firms. Of these specifications, 1, 2, 3, and 4 had worse fit than the models displayed based on the Bayesian information criterion, and 5 and 6 had model fits that could not be statistically distinguished from those of the model displayed. Thus, single-criterion weighting was inferior to the multicriterion weighting used in the models displayed and to the mean or median of all other firms in an industry. In models 3 and 4, the size above the aspiration level had a positive effect that contradicted Hypothesis 2, but otherwise the alternative models gave full support to the hypotheses. Hence, the results appear robust against most alternative specifications of the aspiration level.

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insurance. Variables such as fish catch, timber export, and total industrial employment did not have measurable effects, however, and were omitted from the final specification. The following variables were retained: GDP growth was the ratio of current-year to last-year gross domestic product (GDP), with fixed-price numbers for GDP used to control for inflation. Ship tonnage was the gross tons of all ships registered in Norway and was included because of the key role of shipping in the Norwegian economy in general and the insurance industry specifically. The market concentration of the insurance industry was computed as the Herfindahl concentration index (the sum of squared proportions) of market shares. Firms in a concentrated industry may adopt a strategy of not provoking price wars through such means as not seeking to grow faster than their peers. Initially, the density of insurance firms was also entered as a first- and second-order term, but I dropped these variables because they were collinear with other variables in the specification and could be omitted without affecting the results. The bond yield of long-term (eight years and more) government bonds was obtained from historical statistics published by the Bank of Norway and included as a control for the investment opportunities available to the insurers. Although general insurers do not have an explicit investment role such as life insurance firms have, they keep their reserves invested in interest-bearing and equity instruments. In years with a high rate of return in the bond market, they can grow more easily thanks to this side business. Stock market yields were not available as far back as needed, so only bond yields were entered. The following firm-level control variables were included: Age was the logarithm of the years (plus 1) since a firms founding. Niche count was the number of niches in which an insurer offered products and was calculated by coding the descriptions of activities that each insurer gave in the yearbook of the Insurer Association into 34 different niches. The highest number of niches simultaneously occupied by a firm in the data is 16. Diversified firms may compete less aggressively in each market niche than firms that are committed to few niches (Chen, 1996). To take this effect into account, I entered the firm level of diversification as one minus a Herfindahl index of its distribution of own premiums across the niches. Similarly, firms may compete less aggressively when they have a high level of contact with other firms in multiple markets (Gimeno, 1999; Gimeno & Woo, 1996). To control for this effect, the model has the average multimarket contact of the focal firm with all its

competitors (Baum & Korn, 1996). I formed this measure by taking, for each multimarket competitor (each firm a focal firm meets in at least two markets), the proportion of focal firm markets in which the competitor is also present. This proportion was averaged over all multimarket competitors to yield the average multimarket contact of the focal firm. Finally, the firms growth minus aspiration level was entered. It was calculated as the growth in the past year minus an aspiration level equal to the growth of the year before. Table 1 displays the descriptive statistics. No indicator for mutual organization is shown because this variable was constant within firms and so cancels out in the fixed-effect model, but a little more than one-third of the observations in the data were from mutual firms. Market concentration was low on average and never became particularly high (a maximum of 0.21 was observed in 1997). The correlation table yielded no surprises, with the highest correlations being seen in predictable places, such as the intersection of the current and lagged values of premiums and the intersections of these two and premiums adjusted by aspiration level. As the analysis shows, these correlations did not affect the stability of the coefficient estimates. Models and Hypothesis Tests In this studys model, firm growth is the ratio of next-period and current-period size, and firm growth rate is this ratio minus 1. The Gibrat model of size-independent growth, which uses the assumption that firms have the same growth rate regardless of size, is extended with a parameter that lets growth be size-dependent, because previous analyses have shown that large firms grow more slowly than small ones (Barnett & Carroll, 1987; Barron, West, & Hannan, 1995). The size-dependent growth model is specified as: St 1 St S t y exp( Xt ).

St 1 , is St growth, and the right-side expression is the sizedependence factor Sty multiplied with a set of covariates Xt with associated coefficients and an error term . This is made into a linear model by taking the logarithm of both sides and rearranging terms: Here, S is firm size, the left- side expression, ln(S t 1 ) (1 )ln(S t ) Xt .

Now the model specifies that the logarithm of the size at time t 1 is a linear function of the covari-

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TABLE 1 Means, Standard Deviations, and Correlationsa

Variable 1. Own premiumsb 2. Own premiums, laggedb 3. Ageb 4. Niche count 5. Diversification 6. Multimarket contact 7. Market concentration 8. Ship tonnage 9. GDP growth 10. Bond yield 11. Loss ratio increase 12. Growth minus aspiration level 13. Own premiums minus aspiration level 14. Loss ratio increase greater than 0 (indicator variable)
a b

Mean 7.25 7.18 3.62 3.96 0.25 0.45 0.07 11.62 1.04 5.74 1.01 0.0002 0.48

s.d. 2.62 2.60 0.73 4.02 0.29 0.43 0.03 7.92 0.03 2.85 0.69 4.33 2.12

10

11

12

13

.99 .38 .40 .28 .17 .49 .47 .04 .42 .00 .01 .66 .38 .40 .28 .17 .49 .47 .03 .43 .01 .01 .67

.27 .06 .06 .29 .34 .03 .20 .02 .00 .13

.57 .43 .02 .05 .02 .05 .00 .00 .41

.78 .13 .00 .06 .15 .00 .01 .37 .20 .05 .05 .16 .00 .01 .29 .57 .13 .43 .04 .01 .16

.11 .51 .02 .00 .21

.10 .01 .01 .02

.02 .00 .14

.05 .04 .01

0.43

0.50

.10

.10

.02

.02

.05

.02

.11

.13

.01

.10

.27

.02

.01

The data have 4,842 observations. Coefficients greater in magnitude than .03 are significant at the .05 level. Logarithm.

ates and the logarithm of the size at time t. Hence, the model contains the lagged dependent variable as a way to account for the size dependence of the growth rate. I entered fixed effects for firms to control for stable firm differences in growth. Estimates with no effects, random effects, and fixed effects gave similar results on the hypothesis tests, but the Hausman test showed statistically significant differences of the coefficient magnitudes. The random-effects model was rejected because of significant correlation of firm effects and the covariate matrix, leaving the fixed-effects model as the best available control. Because some of the hypothesis tests involved comparison of coefficient estimates, a combination of t-tests for the significance of individual coefficients and F-tests of coefficient differences were used. Hypothesis 1, stating a greater growth for firms below the aspiration level for size, was tested by the significance level of the coefficient of size below the aspiration level. Hypothesis 2, stating a decreased effect of size above the aspiration level, was evaluated by an F-test of whether the coefficient estimates of size above and below the aspiration level were equal. Hypothesis 3, stating greater growth when performance is low, was tested by the significance level of the performance variable.

To test Hypotheses 4a and 4b, I formed interaction variables between the size variables and an indicator set to 1 when a firm had an increasing loss ratio. If high losses draw attention away from the size goal, as Hypothesis 4a specifies, then the interaction variables will have signs opposite the signs of the main effects of size, and will thus weaken the main effects. If high losses draw attention toward the size goal, as Hypothesis 4b specifies, then they will have the same signs as the main effects of size and thus will strengthen the main effects. The hypotheses concern both interaction variables rather than each individually, so they were evaluated by an F-test of their joint significance. Although these hypothesis tests would seem sufficient, one more test was needed. Recall that in a model with interaction variables, the significance of the main effects depends on the level of the interaction variable (Aiken & West, 1991). Accordingly, in the model with interaction variables, Hypotheses 1 and 2 had to be tested separately for the condition of increasing losses. I evaluated Hypothesis 1 for increasing losses using an F-test of whether the sum of this coefficient and its interaction with the increasing loss indicator equaled 0 and evaluated Hypothesis 2 for increasing losses by adding the size variable above the aspiration level to its interaction for size and computing an F-test of

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whether this sum was equal to the sum of the size variable below the aspiration level and its interaction for size.

Alternative Explanations I specified models to control for various alternative explanations of organizational growth. First, per ecological theory, organizational growth is less than proportional to size because of inertia and regression to the mean (Barnett & Carroll, 1987; Barron et al., 1995). In the size-dependent model of growth used here, this prediction was measured through the parameter , which is negative if growth is less than proportional. The same parameter also captures other explanations related to the absolute size of an organization, such as the prediction that firm growth is a function of the distance from the minimum efficient size. Second, according to managerialist theory, firms grow to the extent allowed by their owners, which means that when control has been separated from ownership, a firm grows more rapidly (Berle & Means, 1965). Managerialist theory does not indicate an effect of size relative to aspiration level on growth, however, and is thus not a plausible alternative explanation of findings on this variable. Managerialist theory does suggest that growth is lower in firms with an ownership form that gives greater owner control. This prediction can be assessed by comparing firms with a joint-stock and a mutual form of ownership, as mutuals have stricter control by owners and thus should grow more slowly. Third, the integration of search theory and inertia theory I have proposed in earlier work (Greve, 1998) implies that the effect of a goal variable on organizational change is weaker below the aspiration level than above it, which differs from the predictions made above. This prediction relies on an assumption that inertial forces counteract change with increasing strength as performance falls below aspiration level, partially canceling out the increase in the likelihood of change caused by organizational search for solutions. Though this argument is suitable for some outcomes, it seems less applicable in this study. Inertia theory applies to core features of an organization, which are its stated goals, forms of authority, core technology, and marketing strategy (Hannan & Freeman, 1984). Organizational size is not part of the core, and thus not subject to strong inertial forces. If size is subject to inertia, however, then the effect should be weaker below aspiration level than above it, contrary to Hypotheses 2 and 3, so this study offers a

critical test contrasting the hypothesized relation and an inertia effect. Fourth, managers may view growth as a performance measure and have aspiration levels for growth as well as for size (Armstrong & Collopy, 1996; Smith et al., 2001). Growth goals would also be consistent with managerial decision making using aspiration levels, though growth goals are less justifiable from the viewpoints of efficiency or legitimacy than size goals are. To ensure that unmeasured effects of growth goals would not influence the analysis, I also included growth relative to an aspiration level in the model. RESULTS Table 2 shows the estimates of the growth models. Model 1 contains only the control variables; in models 2 and 3 the hypothesis-testing variables were entered one at a time, and in model 4 they were entered simultaneously. The findings of these models do not differ, so model 4 is interpreted. Model 4 is the parsimonious specification in which size and performance jointly affect growth but do not interact. In model 5 the indicator variable for loss ratio increase and its interactions with the size variables were added, and the model tests the hypotheses in which performance affects the reaction to size (Hypotheses 4a and 4b). In model 4, the coefficient estimate for premiums (size) is negative and significantly different from 0 below aspiration level, in support of Hypothesis 1. The coefficient estimate above aspiration level is between 0 and the coefficient estimate below aspiration level, as Hypothesis 2 predicts, and the value of F (4.03, p .05) shows that it is significantly different from the coefficient estimate below 0. Hypotheses 1 and 2 are thus supported. Organizations grow faster the further they are below aspiration level for size, and the size-growth relation is weaker above the aspiration level for size. These findings contradict the idea that inertia prevails below the aspiration level, which would lead to a smaller coefficient estimate below the aspiration level than above it. As argued earlier, inertia should not apply to a dependent variable of revenue growth. The coefficient for loss ratio increase is positive and significant and thus supports the prediction in Hypothesis 3 that organizational growth increases when performance is below aspiration level (recall that high losses are worse). This model adds a single variable for loss ratio, as Hypothesis 3 predicts, rather than separate variables above and below aspiration level, as inertia would imply (Greve, 1998). In a model with separate loss ratio variables

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TABLE 2 Models of Premium Growtha

Variables Premiumsb Age Niche count Diversification Multimarket contact Market concentration Ship tonnage GDP growth Bond yield Growth aspiration levelc Growth aspiration leveld Loss ratio increase Size aspiration levelc Size aspiration leveld loss ratio increased Size aspiration leveld Size aspiration leveld loss ratio increased Loss ratio increased (indicator variable) F for Hypothesis 2 (1 df) F for Hypothesis 2 when loss ratio increase (1 df) F for Hypothesis 1 when loss ratio increase (1 df) F for Hypothesis 4a and 4b (2 df) Log-likelihood Likelihood-ratio test vs. model 1 Degrees of freedom Likelihood-ratio test vs. model 4 Degrees of freedom Model 1 0.92** (0.01) 0.13** (0.02) 0.01** (0.00) 0.20** (0.05) 0.09** (0.03) 1.33** (0.35) 0.00 (0.00) 0.45* (0.20) 0.02** (0.00) 0.01** (0.00) 0.003 (0.001) Model 2 0.92** (0.01) 0.13** (0.02) 0.01** (0.00) 0.20** (0.05) 0.09** (0.03) 1.31** (0.35) 0.00 (0.00) 0.45* (0.20) 0.02** (0.00) 0.01** (0.00) 0.003 (0.00) 0.02* (0.00) Model 3 0.98 (0.02) 0.10** (0.02) 0.01** (0.00) 0.20** (0.05) 0.09** (0.03) 0.31 (0.52) 0.01** (0.00) 0.48* (0.20) 0.00 (0.00) 0.01** (0.00) 0.003 (0.00) 0.08** (0.02) Model 4 0.98 (0.02) 0.10** (0.02) 0.01** (0.00) 0.20** (0.05) 0.09** (0.03) 0.30 (0.52) 0.01** (0.00) 0.48* (0.20) 0.00 (0.00) 0.01** (0.00) 0.003 (0.00) 0.02* (0.01) 0.08** (0.02) Model 5 0.98 (0.02) 0.10** (0.02) 0.01** (0.00) 0.20* (0.05) 0.09** (0.03) 0.33 (0.52) 0.01** (0.00) 0.48* (0.20) 0.00 (0.00) 0.01** (0.00) 0.003 (0.00) 0.03** (0.01) 0.08** (0.02) 0.01 (0.01) 0.05 (0.03) 0.05* (0.02) 0.02 4.58* 4.03* (0.02)

0.03

(0.03)

0.03

(0.03)

1.07 5.67** 15.43** 4.39*

2,150.6

2,147.2 6.77** 1

2,139.0 23.08** 2

2,135.9 29.28** 3

2,129.8 41.47** 6 12.18** 3

a A total of 161 firms and 4,842 firm-year observations comprise the data. Fixed effects are reported for firms. Standard errors are in parentheses. The significance tests for single coefficients are two-sided t-tests. b The significance tests in this row are against the null hypothesis that the coefficient of log premiums is unity (1), as predicted by Gibrats law. c If less than 0. d If more than 0. p .10 * p .05 ** p .01

above and below aspiration level, the result of an F-test for equality of the coefficients above and below aspiration level was not significant (1.30, n.s.), which validates the specification with a single coefficient estimate. There is a linear relation between loss ratio and growth, as is expected if problemistic search leads to growth as a solution to losses and is not moderated by organizational inertia. Next, in model 5 I entered the interaction variables testing Hypotheses 4a and 4b, which state that size goals are either deactivated (4a) or activated (4b) when performance is below aspiration

level. The first step in assessing these hypotheses is to examine the joint significance of the two interaction variables of premiums relative to aspiration level with the indicator variable for loss ratio increase. The result of this test is significant (F 4.39, p .05), which shows that the loss ratio moderates the response to size relative to aspiration level. The coefficient estimates of the interaction variables are opposite to the main effects in sign, showing that the size goal becomes less important when a firm has losses. This finding is consistent with Hypothesis 4a, predicting sequential attention with performance as the higher priority, and is

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FIGURE 1 Estimated Size Effect on Growth

contrary to Hypothesis 4b, predicting size goal activation when performance is low. The interaction variables are numerically smaller than the main effects, and the F-tests for Hypotheses 1 (15.43, p .01) and 2 (5.67, p .01) when the loss ratio is increasing are still significant, which shows that the deactivation of the size goal is not complete. The size goal affects growth even when a firm experiences high losses but does so less strongly than when the firm experiences low losses. The sequential attention seen here is thus not a strict sequence in which losses are addressed prior to size goals, but instead it takes the form of less attention to the size goals in the presence of losses. However, the weaker reaction to size above aspiration level posited by Hypothesis 2 is no longer significant when the loss ratio is decreasing (1.07, n.s.). Figure 1 displays the predicted relation of size to growth implied by the estimated coefficients in model 5. Some findings on the control variables are noteworthy. The coefficient estimate of the log of premiums is not significantly different from 1, supporting the size-proportional growth predicted by Gibrat rather than a size-dependent growth rate. This coefficient could be affected by regression toward the mean size, which would result in an estimate below 1, but instead it is very close to 1. Age

and niche count have positive and significant effects on the growth rate. The model does not contain an indicator for mutual firm because this indicator is constant within firms and thus not identified when fixed effects are entered. In a model with random effects, the coefficient estimate for mutual firm is negative and significant, in line with managerialist theory. The less-constrained joint-stock firms grew more rapidly. Diversification had a positive effect on the growth rate instead of the negative effect predicted on the basis of the theory of strategic focus. The reason may be that the diversified firms were better represented in highgrowth niches, and specialist firms were numerous in older and stagnant niches such as fishery insurance. Firms with high levels of multimarket contact grew more slowly, as predicted on the basis of the theory of mutual forbearance. Growth relative to aspiration level has an unexpectedly positive coefficient estimate below aspiration level and is not significant above aspiration level. Examination of the data revealed that this was because low growth relative to aspiration level often occurred following a year in which a firm had unusually high growth. In fact, this coefficient can be made negative and insignificant just by dropping 21 observations in which firms had expanded

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at least fivefold the year before, and thus had very high aspiration levels (dropping these observations had no effect on the other findings). This finding could imply that managers do not update their firms aspiration levels in response to years with unusually high growth or that organizations that have just completed a set of strategic actions for quick growth seek stability in order to consolidate the gains. Because there is a good explanation for this finding that does not involve aspiration levels, I conclude that the analysis shows little support for growth rate as a goal variable. Size goals are easier to justify than growth rate goals, and indeed the evidence for size goals is better than that for growth rate goals. One may ask whether the growth patterns demonstrated here were beneficial for the firms or not. This question can be answered by examining whether losses and administrative costs increased proportionally to firm scale or more or less than proportionally. An aspiration level for size based on a weighted average gives good decisions if there are increasing returns to scale for small firms and decreasing returns to scale for large firms. Thus, I estimated time-varying three-segment Cobb-Douglas production functions (Cobb & Douglas, 1928) of losses, administrative costs, and the sum of these costs as a function of size and selected other covariates. The analysis showed that small firms had larger losses after 1950, and large firms had larger losses throughout. Analysis of administration costs showed that most firms were below minimum efficient size. Analysis of total costs showed increasing returns to scale for small and medium-sized firms and decreasing returns to scale for large firms before 1950, and increasing returns to scale for small firms and proportional costs for medium and large firms after 1950. The analyses thus suggest that firms in the (upper) range of medium size were most efficient. However, the average firm size did not reach the estimated optimal firm size until 1970, so many firms had aspiration levels below the optimum before that period. Thus, although size aspiration levels correctly signaled a need for the smallest firms to grow, they also signaled to mediumsized firms that they were above their optimal size when in fact they were below it. DISCUSSION The observation that organizations seek to meet aspiration levels on multiple goal variables has long been part of organizational theory (Cyert & March, 1963). However, in spite of this theory and the suggestion that goals for profitability, sales, and production exist, researchers interested in organi-

zation-level goals have so far emphasized profitability. The finding that aspiration levels for size influence organizational growth is important because it empirically supports the validity of the theoretical call for research on a broader range of organizational goals. It is a finding of broad interest because social comparison is a novel explanation for organizational size, which has been a favorite independent variable in organizational research without there having been a corresponding interest in its causes (Kimberly, 1976). Implications for Further Research Examination of multiple goals opens up new avenues for research. Sequential attention to goals, a key element of the theory of multiple goals (Cyert & March, 1963), leads to the prediction that organizational responses to goals differ depending on whether other goals are met or not. Thus, it is important that this study showed a moderating effect of performance: for organizations with low performance, the relation between size and growth was weaker. This study appears to be the first empirical demonstration of sequential attention to goals in organizations using quantitative methods. I developed the method of interacting each goal variable with an indicator variable for whether the other goal variable was fulfilled specifically to test the sequential attention hypothesis. This method is easily replicable, and it should be useful for future research on sequential attention to goals. Organizational size is just one of many possible goal variables to investigate, but it has special significance because the actions taken to reach a certain size are highly consequential. Indeed, actions that lead to organizational growth such as mergers, acquisitions, and market entry have already been studied from other theoretical perspectives (e.g., Boeker, 1997; Haunschild, 1993; Hirsch, 1986; Pfeffer, 1972). It is time to revisit research on these outcomes with size goals as a predictor variable. On the basis of the findings reported here, one would expect all these strategic actions to occur more frequently in firms below their aspiration level for size. The findings are also relevant to work on growth of production systems, such as acquisition of assets and hiring. Revenue growth and asset growth are interdependent for organizations seeking to reach optimal size, as revenue growth justifies asset growth, which again allows efficiency increases that justify further revenue growth. The theoretical implications of these findings are important. The aspiration-level explanation for organizational growth is parsimonious to the point of seeming simplistic: managers seek growth when

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they believe that their organization is too small. It is valuable because it makes use of well-known facts about individual decision making and organizational behaviors to make novel predictions. Organizational pursuit of goals and socially constructed aspiration levels are microlevel theories of individual decision making that have solid empirical support (Heath et al., 1999; Lant, 1992; Locke, Frederick, Buckner, & Bobko, 1984). When they are combined with the idea that organizational size has implications for performance that are potentially large but difficult to judge, they produce the proposition that managers use available information to form heuristic judgments about the optimal size of organizations. This proposition yields clear and specific predictions when coupled with theory on how managers act on such judgments. Here, the theory lends insights and provides evidence on how managers form and act on aspiration levels for organizational profitability (Audia et al., 2000; Bromiley, 1991; Greve, 1998). The findings come with some cautions about generalizability. First, arguments on when managers seek growth do not allow prediction of actual growth rates if technical or governance constraints counteract growth attempts. The insurance industry is more easily scalable than many manufacturing industries, which may make it a good context for finding support for these predictions. On the other hand, mutual firms were common in these data and were more constrained by governance structure than joint-stock firms. Hence it is unclear whether other industries will show stronger or weaker growth reaction to goals for organizational size. It is important to test whether these findings hold for other industries as well, and it is especially so for manufacturing industries, in which strong size effects on efficiency have often been seen. Second, the ability to adjust organizational size depends on the relative strength of adaptation ability and selection strength (Levinthal, 1991). It is notable that many insurers could survive despite being far below minimum efficient size. Clearly, if selection of organizations with inefficient size had been strong in this population, the small organizations would have been eliminated too quickly to show how their reactions to size goals varied. However, slow removal of weak organizations is fairly typical in organizational populations (Carroll & Harrison, 1994), so contexts in which organizations of inefficient size are eliminated rapidly may be rare. In these data, a supplementary analysis of firm failures showed that small firms were more likely to fail. However, the total number of failures was too small to affect the size distribution much, even though most of the failed firms were small.

Limitations Three important limitations are associated with this study. First, some researchers have examined the effects of slack search on outcomes such as innovations or risk taking (Greve, 2003a; Nohria & Gulati, 1996; Singh, 1986). Slack search seems less relevant to a study on organizational growth and thus was not included in this study. Still, it seems valuable to control for slack to ensure that unmeasured effects of slack do not affect findings. Second, according to the theory developed here, growth is an intentional result of specific actions such as price reductions, sales campaigns, and market entry. This study examined the final outcome of growth only, however, and did not show which actions managers took to accomplish it. A supplementary analysis of market entries showed that they were affected by size relative to aspiration level in the same way as growth was, but market entries were rare events that most likely were not the main tool for growing. Research on both actions and outcomes would be a valuable addition to the evidence presented here. Because organizations may take multiple actions in pursuit of size goals, a promising approach would be to apply broad measures of competitive aggressiveness (Ferrier, 2001; Ferrier, Fhionnlaoich, Smith, & Grimm, 2002). Finally, the theory developed here does not consider whether behavior changes if the failure to reach aspiration levels is of large magnitude or persists for a long time. Others have suggested that behavior changes under such circumstances, as severe or long-lasting low performance may be seen as a threat or a sign of decline (Cameron, Kim, & Whetten, 1987; Staw, Sandelands, & Dutton, 1981). Such interpretations might reverse the prediction of higher risk taking at low levels of goal fulfillment (Audia & Greve, 2006; March & Shapira, 1992). Conversely, it may be of interest to investigate whether long periods in states above aspiration levels affect behaviors. With the present theory, I assume temporal myopia (Levinthal & March, 1993), so it does not matter for firm behavior whether a specific value of size relative to aspiration level was reached via a path of multiple years in a condition below aspiration level, multiple years above it, or years of oscillation. Temporal myopia is a parsimonious assumption, and thus a good starting point, but one could add theory that posits effects of experience with goal fulfillment on the currentperiod responses. These findings have implications for how we view the causes and effects of organizational size. My theory of organizational size goals is an important contrast to other theories of organizational size

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because it contains only very basic assumptions about the motivations and capabilities of managers. The manager in this theory is less heroic than the profit-maximizing manager with full knowledge of optimal size and less menacing than the powerhungry manager seeking to build the largest possible organization. The manager pursuing size goals seems more human than the other two and more prone to the type of nonoptimal behavior known as the honest mistake. My theory of organizational size goals raises the question of what conditions would make managers prone to having aspiration levels that differed from the optimal size. Clearly, good information about how size relates to performance would free managers from judging size through social comparison. Cognitive maps of an industry would help by identifying which other firms have the most similar strategies and thus are the most relevant for making judgments about organizational size (Baum & Lant, 2003; Porac & Thomas, 1990). An unfavorable condition would be biased information from press coverage of unusual firms such as the largest or most successful (Strang & Macy, 2001). Another unfavorable condition would arise when an organizational population has high diversity in strategies, as when specialists and generalists are mixed. Usually specialists are small because they occupy limited and often peripheral niches in a market. A manager who ignores these differences while forming an aspiration level in a population of small specialists and large generalists will likely aspire to a size too small for a generalist and too large for a specialist. It may be because of this relationship that studies often show that organizations of intermediate size are vulnerable to failure (Boone et al., 2004; Hannan, Ranger-Moore, & Banaszak-Holl, 1990). Conclusion Organizational growth driven by sequential attention to goals of performance and size is a specific proposition drawn from the behavioral theory of the firm (Cyert & March, 1963). It is an old yet underinvestigated idea, and it yielded promising findings in a longitudinal study of general insurance firms. This work opens several opportunities for additional research. First, it would be interesting to investigate which goals other than profitability and size affect organizational behaviors. Are there other goals that are general enough to be subject to social comparison among many organizations, or do organizations instead have unique goals that are results of their specific dominant coalitions? Second, this work raises the question of how general the pattern of sequential attention is.

Will other goal variables also show different effects depending on firm performance? Is it correct to place firm performance first in the attention sequence, or are attention sequences more variable across firms? Third, these findings seem to imply a need to revisit research on behaviors that affect firm size. Are mergers done primarily because of firm experience and availability of good targets, or do firms aspiration levels for size influence their pursuit? Despite the progress made here and in other recent research on multiple organizational goals (Audia & Brion, 2007; Baum et al., 2005; McNamara et al., 2002), organizational responses to goals still define a research area where important questions remain unexplored. REFERENCES
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Henrich R. Greve (henrich.greve@insead.edu) is a professor of entrepreneurship and organizational behavior and INSEAD Chair in Organization and Management Theory at INSEAD. He received his Ph.D. in business at the Graduate School of Business, Stanford University. His research examines learning and strategy in networks, performance feedback effects on organizational change, and identities of newly founded organizations.