Swinging for the Fences? Payroll, Performance, and Risk Behavior in the Major League Baseball Draft

Abstract

This study examines the way competitive advantage and organization performance mediate the effect of potential slack—externally available resources—on organization risk behavior in Major League Baseball’s amateur draft. It tests the hypotheses that local market munificence provides payroll advantage and increases on-field performance and that payroll disadvantage and poor performance increase teams’ likelihood of selecting riskier high school players instead of college players. Consistent with risk sensitivity theory, results suggest that payroll disadvantage promotes risk-taking; however, on-field success encourages risk-taking early in the draft. Indeed, pick number appears to have a U-shape relationship with risk-taking where winning increases confidence earlier in the draft and low stakes promote risk-seeking later. This study contributes to the literature by suggesting that input- and outcome-based reference metrics have different effects on risk behavior and that managerial hubris may influence risk behavior through information availability rather than having a general effect.