Firms seeking to recover from periods of underperformance adjust their exploratory and exploitative behaviors to restore their performance to their aspiration level. Although such recovery is central to the behavioral theory of the firm, little is known about the recovery itself and its behavioral implications. Hence, this study explores how the underperformance intensity from which a firm has recovered is related to a firm’s degree of exploration and exploitation and how the current performance level moderates these relationships. Econometric analyses of over 1,400 U.S. parent firms across a decade reveal that a higher underperformance recovery intensity is associated with lower degrees of exploration and exploitation. Firms’ current performance level below aspiration moderates these relationships negatively. These findings explain patterns observed in industry and extend the behavioral theory of the firm by reintroducing the vital notion of underperformance recovery and disentangling its behavioral implications.
