The Quality of Attention Matters:

Does the organizational ambidexterity influence the growth?

Jeesoo Kim

EDUC 287B

Causal Inference: Methods for Program Evaluation and Policy Research

14th June, 2022

Based on organizational search literature, this paper examines how organizational

ambidexterity (i.e., paying attention to both exploitation and exploration) impacts

organizational growth. Specifically, drawing upon the idea that vigilance attention (Ocasio,

2011) works as a way to correct the lopsided attention and contributes to the organizational

growth, this paper posits that vigilance of CEO attention to exploration is positively

associated with the firm’s revenue growth rate. Moreover, given that the impact of CEO

vigilance can be strengthened when organizations are oriented toward the exploitation, this

paper hypothesizes that CEO attention to exploitation and the ratio of R&D-related

executives will moderate the relationship between CEO vigilance and revenue growth rate. In

doing so, this paper offers insights into how sustenance of constant attention to exploration

can give rise to better organizational growth.

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THEORETICAL BACKGROUNDS & HYPOTHESES

For a better organizational performance, organizational search plays a pivotal role.

Depending on where and how organizations search the knowledge to innovate, firm growth

can vary to a great extent. When engaging in the search, firms span technological boundaries

and go beyond the technological envelope in which they are already have base knowledge (i.e.,

exploration), resulting in a better performance (Rosenkopf & Nerkar, 2001). For example, in

the optical disk industry, firms who cited the patents outside the focal optical disk field yielded

a significantly higher performance than those who didn’t. Chemical industry also showed a

similar patten with firms diverging from prior patent classes marking higher innovation

performance (Ahuja & Morris Lampert, 2001). Since pursuing only the familiar domains (i.e.,

exploitation) can lead the firms to fall into the competency trap (Levitt & March, 1988), it has

been shown that avoiding the excessive exploitation is essential in assuring higher

organizational performance.

However, at the same time, exploration has been proven to bear high risks since it puts

the organizations under a high level of uncertainty. By diversifying their businesses to

unfamiliar fields, firms can have difficulties to integrate the existing knowledge and experience

lower growth (Kim, Arthurs, Sahaym & Cullen, 2013). Moreover, depending on how dynamic

the environments are, exploration which leads the firms to experiment with diverse

technologies can also be detrimental to the organizational growth (Sidhu, Commandeur &

Volberda, 2007). In a highly dynamic environment, new, diverse technologies can be employed

to try novel combinations. In stark contrast, a stable environment which already passed the

ferment stage with mature technologies will offer less room for innovative combinations and

consequent growth.

One possible solution to this managerial dilemma between exploitation and exploration

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has been paying more attention to exploration while managers are naturally geared toward the

exploitation. In other words, dominant answer to this exploitation-exploration dilemma has

been the increased quantity of attention to the exploration. However, these studies have paid

scant attention to how the quality of attention to exploration affects the organizational outcome.

I find the answer to this lack of studies regarding the quality of attention in the attentional

vigilance. Vigilant attention which lets the managers sustain their attention toward exploration

has been hypothesized to be the key to the high organizational growth (Ocasio, 2011). While

there has been no study to empirical investigate the impact of vigilant attention to the

organizational outcome, I hypothesize in this study that the vigilance of CEO attention to

exploration contributes to higher organizational growth. Vigilant attention to exploration will

enable CEO to constantly monitor external opportunities and capture them faster than his / her

competitor. Additionally, continuous attention to exploration will better motivate the

explorative units (e.g., R&D departments) since these units will be given better premises that

their projects will not be discontinued at any time. If CEO’s lopsided attention to exploitation

leads the explorative projects to be discontinued in the middle, these explorative units will need

to remind themselves of where they were and start the capability development again which will

stunt the organizational growth.

Hypothesis 1. The vigilance of CEO attention to exploration is positively associated

with revenue growth rate.

Furthermore, given that the impact of CEO attentional vigilance can be strengthened when

CEOs are oriented more strongly toward the exploitation, I further suggest that CEO attention

to vigilance (managerial-level orientation toward exploitation) and ratio of R&D-related

executives (organizational-level orientation toward exploitation) moderate the relationship

between the vigilance of CEO attention to exploration and organizational growth.

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 Hypothesis 2. The vigilance effect gets larger when CEO pays more attention to

exploitation.

Hypothesis 3. The vigilance effect gets smaller when the ratio of R&D-related executives

increases.

Theoretical model of this paper is shown in Figure 1.

DATA & METHODOLOGY

Data

To test the hypothesis of this paper, I collected the data on operations of manufacturing

firms in Fortune 500 companies between 2008 and 2017. While Fortune 500 firms are widely

used in management literature to guarantee the diversity of industry sectors of data, our study

focused on the manufacturing sector since it accounts for the biggest proportion in Fortune 500

firms.

For organizational search behavior such as attentional vigilance, this paper employed

the data on earning conference calls. This data allowed us to measure the variation in CEO

attention across four quarters and calculate the CEO vigilance on a yearly basis. For CEO- and

organizational level attributes such as ratio of R&D-related executives, I obtained the data from

Compustat ExecuComp and annual fundamentals database.

The final data set included the 1793 firm-year observations with 163 firms with unique

gvkey as their identifiers.

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Variable description

Dependent variable

Revenue growth. We measure revenue growth as the ratio of the next period and current-

period revenue. Following Greve (2008), we use the Gibrat model of size-independence

growth but relaxing the assumption of size-independence. We rearrange the model into a

linear form by taking the logarithm of both sizes as below:

ln 𝑅𝑅𝑡𝑡+1 = (1 + 𝛾𝛾) ln 𝑅𝑅𝑡𝑡 + 𝛽𝛽X𝑡𝑡 + 𝜀𝜀

where 𝑅𝑅 is revenue, X𝑡𝑡 is the set of covariates associated with the coefficients 𝛽𝛽 and an error

term 𝜀𝜀.

Independent variables

Attentional vigilance. is operationalized by analyzing data on CEO’s language patterns in

their speech in earnings conference calls. We developed dictionaries to track attention to

exploration and exploitation via the number of exploration-oriented (e.g, search, variation,

risk taking, experimentation, play, flexibility, discovery, innovation) and exploitation-oriented

(e.g., refinement, choice, production, efficiency, selection, implementation, execution) words

that CEOs used in conference calls based on the original definition of exploration and

exploitation in March (1991). Following Uotila, Maula, Keil, and Zahra (2009), we then

quantify the relative amount of attention to exploration by calculating the proportion of

number of exploration-oriented words over the sum of number of exploration-oriented words

and exploitation-oriented words for each quarter. Then for a given year, we calculate the

standard deviation of attention to exploration across the four quarters, to measure the extent

to which the amount of attention to exploration fluctuates over time. We reverse code this
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measure given that attentional vigilance is the level of sustained concentration on a particular

stimulus over time (Ocasio, 2011)

Moderating variables

Attention to exploitation. is operationalized as the average amount of attention to exploitation

per quarter for a given year, to distinguish the effect of quantity of attention from the level of

attentional vigilance.

number of exploitation − oriented words

sum of number of exploitation − oriented words and exploration − oriented words

Ratio of R&D-related executives To collect the data on ratio of R&D-related executives, this

paper utilized the ExecuComp database. First, following previous literature on top management

team which categorizes CEO, chairman, CFO, COO/president, and the next layer of the

management hierarchy as the executives (Carpenter & Fredrickson, 2001; Marcel, 2009), I

sorted out those who hold the above-mentioned titles. Then, following extant literature on

executives’ functional background (Carpenter & Fredrickson, 2001; Marcel, 2009), I

categorized these executives into five different functions of Production & Operation (HR),

R&D, Accounting & Finance, Marketing and General Management depending on the job titles

they hold for a specific year. Examples are shown in the Table 1.

For those who belong to the next layer of the management hierarchy (e.g., vice president), I

coded the executives with the specified function (e.g., Executive Vice President, Human

Resources / Executive Vice President of Finance and Administration) in the same way with the

top executives. When their functions are not specified (e.g., Senior Vice President, U.S.

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Nutrition /Executive Vice President, Medical Devices), I coded them as the General

Management.

Control variables

Firm-level

Firm age. We control for firm age by computing the firm age as the difference between the

year t and the year when the firm was founded.

Firm size. we controlled for firm size using the natural log of total assets since large firms

could afford more actions directed at increasing performance and show higher revenue

growth.

R&D intensity. We also included research and development (R&D) intensity (R&D

expenditures divided by sales) for each year. Firms with high R&D intensity invest more in

the internal growth and thus, have higher firm performance (Chatterjee & Hambrick, 2007;

Sanders & Hambrick, 2007). Moreover, investment in R&D functions as a tool to search for

new directions to increase revenues or decrease costs (O’Brien & David, 2014). In particular,

when performance falls below the aspiration level, organizations strive to close the gap

between performance and aspiration by engaging in risk-taking behaviors such as investing in

R&D (Cyert & March, 1963; Greve, 2003). Given the empirical research showing the

relationship between R&D intensity and firm performance (Chen & Miller, 2007), we

controlled for R&D intensity.

R&D dummy. As some of firm-year observations in our sample have missing R&D

expenditures, we followed previous studies by coding the R&D missing as zero and creating

a dummy variable for these firm-year observations to distinguish the effect of non R&D from
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missing data on R&D (e.g., Shi, Connelly, Mackey & Gupta, 2019).

ROA. To control for the impact of performance on the growth, we controlled for the return on

assets (ROA), which is net income divided by total assets (Crossland & Hambrick, 2007;

Hambrick & Quigley, 2014).

Mergers and acquisitions (M&As) , New Products, Expansions, Strategic Alliance. To

control for the number of actions that can contribute to the increase in firm performance (Shi,

Connelly & Cirik, 2018), we counted the total number of new product introductions, M&As,

business expansion, and strategic alliances a firm has announced throughout the year (Shi,

Connelly & Cirik, 2018; Shi, Connelly, Mackey & Gupta, 2019). The data was obtained

from announcements listed in the Capital IQ Key Development database. Drawing from

sources such as press releases, news wires, regulatory filings, exchanges, company websites,

web mining, and call transcripts, Capital IQ Key Development database shows material news

and event that can have an impact on the market value of securities. This database includes

details such as the date of announcement, situation summary, type, and company role

(Introduction to S&P Capital IQ, 2020). Key development categories listed in this database

have been widely used in finance and accounting research since this database provides a more

comprehensive set of information than the earnings announcements alone (Jin, Livnat &

Zhang, 2012; Livnat & Zhang, 2012; Pan, Wang & Weisbach, 2015).

We classified announcement as M&As if they are categorized as “M&A transaction

announcement” and contain information on M&As that the company implemented during a

year.

While this database includes all product-related announcements, we classified the

announcements as New Products only when they are on new product launches. We excluded

announcements that are not related to new product launches (e.g., product recall) from the
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New Products measure.

For Expansions measure, we counted the number of announcements in “Business Expansion”

category. Announcements in this category includes those on opening of new stores and

plants, creating a new subsidiary abroad, and earning product approval in foreign markets.

Strategic alliance measure counted the number of announcements containing the information

related to creation and extension of strategic alliances.

CEO-level

CEO age. Given that younger CEOs are more likely to engage in risky decisions which lead

to revenue growth (Quigley, Hambrick, Misangyi & Rizzi, 2019), we controlled for the CEO

age as reported in the 10-K filings.

CEO tenure. CEOs are more likely to implement strategic change in the early years of their

tenure and experience higher growth (Boeker, 1997; Wu, Levitas & Priem, 2005). In contrast,

CEOs with longer tenure tend to be risk-averse, adapt less to the external changes, resulting

in lower revenue growth (Miller, 1991; Levinthal & March, 1993). We therefore controlled

for CEO tenure measured by the number of years in office.

CEO change. New CEO succession is more likely in the times of poor performance.

Consequently, successors are more likely to engage in different production and investment

initiatives to turn the performance around (Beatty & Zajac, 1987). So, to control for the CEO

change, we created a binary variable for the CEO change, indicating that a new CEO was

appointed at year t.

CEO option. We control for the value of the stock option pay that the CEO receives in

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million US dollars, based on the Black-Scholes method, from the Execucomp to control for

the effect of option on increased firm risk taking and possible revenue growth (Sanders &

Hambrick, 2007).

CEO compensation. As the total value of compensation a CEO receives can increase the level

of confidence in CEOs about their capabilities, higher compensation can induce CEOs take

higher level of risks and implement more innovative projects (Malmendier & Tate, 2005)

Thus, we also controlled for the total compensation value that CEO received during a year

from Execucomp measured in million US dollars.

Statistical method & Endogeneity control

While this paper employed generalized estimating equations, I used random effects

model, not fixed effects model, given that there exists a comparatively large variation

between firms in terms of dependent variable which does not vary greatly over the sample

period.

My paper is subject to possible endogeneity concerns. First, there could be an issue of

reverse causality, given that firms with high growth have higher propensity to invest in

innovative projects (Lee, Lee & Lee, 2003). There also exists an issue of self-selection if

there are unobservable firm characteristics that lead firms to have a high level of attentional

vigilance and simultaneously high firm growth (Clougherty, Duso & Muck, 2016).

To solve these issues of endogeneity, I will employ three different methods. First,

given that it can take time for a specific firm action to affect the firm growth, I will employ

the lagged dependent variables. Specifically, I will use 1-,2-, and 3-year lag.

Secondly, to control for endogeneity, I will use the propensity matching method and
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compare the revenue growth rate between firms with high vigilance and low vigilance

(Chang & Shim, 2015). First, to calculate the predicted probability of treatment (i.e., having a

high level of vigilance), I will calculate the propensity score employing firm- and CEO-level

attributes such as firm size, firm age, ROA, CEO age, CEO tenure, CEO functional

backgrounds, and CEO compensation which have been shown to affect the level of CEO

vigilance. Then, based on these propensity scores, I will match the firms which score top 20%

percent in terms of the level of CEO vigilance with those who mark bottom 20% in vigilance

level. Then, by comparing the revenue growth difference between these two groups, it will be

possible to control for the possible endogeneity issue.

Moreover, I will also implement instrumental variable approach to establish more

stringent causality between CEO attentional vigilance and revenue growth ratio. While using

instrumental variable has been shown to be an effective approach to address causality in

strategic management field (Bascle, 2008), I will use CEO political ideology as the

instrumental variable that meets both relevance and exclusion restriction condition. For

relevance condition which requires a nonzero correlation between the instrument variable and

independent, endogenous variable, CEO political ideology satisfies this condition, given the

studies that show the impact of CEO political ideology on innovation outcomes. For instance,

Kashmiri and Mahajan (2017) examined the impact of the CEO political liberalism on his /

her firm’s rate of new product innovations which is a proxy for organizational

innovativeness. Instrumental variable is also expected to meet the exclusion restriction

assumption which assumes that instrumental variable is associated with the dependent

variable only through the independent, endogenous variable. CEO political ideologies will

satisfy this assumption, given that CEO political ideologies is more likely to be fixed from

the early stage of his / her career, whereas current revenue growth ratio is more likely to be

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related to more contemporaneous factors. Additionally, with the data on CEO political

ideologies, I will show a low correlation between CEO political ideologies and revenue

growth rate to empirically prove the exclusion restriction assumption being met. Following

Chin, Hambrick, and Treviño (2013), I will measure CEO political ideology using CEO’s

political donation amount for ten years before starting his / her tenure as CEO to democratic

and republican party, respectively.

POSSIBLE CONTRIBUTIONS

By delving deeper into how quality as well as quantity of the attention matters in

assuring the organizational growth, this paper will complement the traditional attention-based

view (ABV) which argues that more attention to exploration yields better performance

(Ocasio, 1997). In particular, this paper will show that promotion of exploration depends not

on the scarcity of attention, but on the sustenance of the attention. Additionally, this paper

will also introduce a new view of organizational ambidexterity. Whereas previous studies of

ABV have assumed that paying more attention both to exploitation and exploration plays a

pivotal role in yielding higher performance, my study will empirically show that maintaining

a stable attention toward the exploration, although the attention to exploration may be lower

than that to exploitation, results in higher organizational growth.

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TABLES

Table 1.

Examples of CEO title categorization

Job title Functional background R&D-related?

Chief executive officer & General management No

Chief legal officer & Chief

compliance officer

Chief R&D officer & Chief R&D Yes

information officer & Chief

technology officer

Chief finance officer Accounting & Finance No

Chief operations officer & Product & Operation No

Chief HR officer

Chief sales officer & chief marketing No

marketing officer

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FIGURES

Figure 1.

Theoretical model

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