A Behavioral Theory of Market Retrenchment: Role of Changes in Market Shares and Market Attractiveness

The behavioral theory of the firm offers a robust framework for explaining how firms react to performance feedback. However, less is known about how firms integrate backward-looking performance feedback with forward-looking assessments of market opportunity when making market retrenchment decisions. To address this gap, this study investigates how the interaction between market share performance and market attractiveness shapes retrenchment decisions, using prefecture-level data from Japanese life insurance companies (2006–2019). The findings reveal that market attractiveness substantially moderates a firm's response to gaining or losing market share. In attractive markets, share gains and losses alike are associated with reduced retrenchment, as firms are motivated to invest in addressing challenges or capitalizing on success. Conversely, in unattractive markets, either outcome is linked to greater retrenchment, indicating a strategy of withdrawal. The paper contributes to the behavioral theory of the firm by demonstrating that market attractiveness acts as a cognitive filter. This filter shapes the interpretation of performance feedback, ultimately determining whether a firm responds to performance changes by increasing or decreasing its market withdrawal. The results also suggest a structured way for managers to approach retrenchment, prompting critical questions about resource allocation that help distinguish rational analysis from common behavioral biases.