Abstract: In the face of performance shortfalls, how will entrepreneurs respond and take actions? Although existing studies have established a direct relationship between performance shortfalls and diverse organization behaviors and outcomes (e.g., R&D, mergers and acquisitions, strategy adjustment, and organizational learning, etc.), they have ignored the role of information interpretation and problem assessment in the process of performance feedback and their impact on the final decisions. Integrating the behavioral theory of the firm and institutional theory, we propose that entrepreneurs' perception of the institutional environment will affect their feedback interpretation and problem attribution, leading to subsequent search behaviors and strategic choices. Our study helps open up the “black box” of performance feedback process. Using data from a nationwide survey of Chinese entrepreneurial firms conducted in 2010, we find that entrepreneurs' perception of the institutional environment has a significant impact on their attribution of firm performance shortfalls, which in turn can influence their time allocation decisions. Specifically, when entrepreneurs perceive that the institutional environment is stable and well-functioning, they are more likely to attribute the performance shortfalls to internal management problems, thus investing more time in internal-oriented management activities. In contrast, as the perceived deterioration of the institutional environment increases, they are more likely to attribute the performance shortfalls to external networking problems, leading them to allocate more time to external-oriented networking activities.

Key words: performance shortfalls, time allocation, institutional environment, internal management, external networking