Is managerial discretion high in small firms? A theoretical framework

A significant body of research assumes that managerial discretion is high in small firms. However, this assertion is based on simplified explanations linking specific firm characteristics, particularly resource, structural, and ownership characteristics, with a unilateral and objective view of managerial discretion. Adopting a perceptual and multidimensional conceptualization of discretion, and employing an information processing perspective, we challenge this assumption and build a theoretical framework that explains how these key firm characteristics shape executives’ perceptions of strategic choice availability (latitude of actions) and strategy implementation ability (latitude of objectives). We contribute to the theoretical development of the managerial discretion construct by providing a more nuanced perspective on the relationship between firm size and managerial discretion. We also point to the importance of incorporating perceptions of managerial discretion in research exploring opportunity recognition, entrepreneurial orientation, and strategy formation and implementation in small firms and family businesses. Plain English Summary Do small business managers pursue strategic initiatives more freely than those in larger firms? Our study suggests that the answer is not as simple. While prior research argues that executives in small businesses objectively face reduced constraints to devise and enact strategies, we suggest that important limits to managerial discretion may arise from executives’ subjective interpretations of various firm conditions. Specifically, while the flatter organizational structures specific to small firms may allow managers to perceive a greater range of available strategic choices, higher resource availability may limit such perceptions. In turn, higher resource availability may allow managers to perceive a greater ability to implement strategic actions, but such perception might be more limited in firms with flatter organizational structures. Furthermore, ownership concentration acts as a contingency of these relationships. We suggest a revision of assumptions in scholarly work on managerial discretion in small firms and an increased firm and governmental oversight body awareness of executive discretion perceptions, which may lead to a calibration of structural design, ownership, and resource allocation interventions.