Perspectives on Firm Decision Making During Risky Technology Acquisitions

Adam Powell, Partner and President of Payer+Provider

Abstract: A novel survey dataset on computed tomography (CT) machine acquisition is used to explore which theories best answer two questions from the decision making literature. First, what determines how much uncertainty a firm has when investing in updated technology? Second, what determines the value of the acquisition? In answering these questions, two theoretical comparisons are conducted. In the first, economic theory, behavioral theory (the Behavioral Theory of the Firm and Prospect Theory), and Bounded Rationality are tested as potential determinants of acquisition uncertainties. In the second, economic theory and Prospect Theory are tested as potential determinants of the value of the machine acquired.

To answer these questions, hospitals were surveyed about the acquisition of their most valuable computed tomography machine. From the survey data, support was found for the Bounded Rationality hypothesis; firms have less uncertainty about an acquisition’s performance on attributes that correspond to more strongly held objectives. Support was also found for the behavioral theory hypothesis; firms whose prior machines perform below aspiration levels seek more uncertainty in their subsequent acquisitions,
while firms whose machines perform above aspiration levels seek less uncertainty. No support was found for the normative hypothesis; acquisition uncertainty is determined by economic attributes.

In the second comparison, partial support was found for the normative theory hypothesis and no support was found for Prospect Theory hypothesis. The value of the acquisition increased as the minimum lifespan of the acquisition increased. Perceived revenue, operating cost, and financial factor uncertainty did not significantly influence acquisition value, providing no support for Prospect Theory. However, greater uncertainty over the acquisition’s ability to fulfill customer desires was associated with the acquisition of a less expensive machine.

Studies of the influence of uncertainty on capital investment decision making have traditionally focused on financial forms of uncertainty. The results of this study suggest that the influence of uncertainty related to an acquisition’s ability to fulfill customer desires may have an even stronger influence on the value of an acquisition than variables related to the non-perceptual characteristics of the acquirer.

Read the full dissertation here.