1018: The Fallacy of Sunk Cost:The Impact of Investors’ Sunk Cost on Reinvestment in Underperforming Firms (17817)

While existing studies mainly examine founders’ persistence in underperforming firms (UPF), little is known about when key stakeholders, such as investors, persist in UPF. Drawing on sensemaking theory, we theorize that investors, tethered by sunk costs in previously funded firms but underperforming, are likely to exhibit persistence. Using a conjoint experiment with 2,016 decisions nested within 126 participants, we find that when considered in isolation, investors' sunk cost has no direct significant effect on their decision to persist and reinvest in firms they initially funded but are underperforming. However, when considered conjoint with the entrepreneur’s personal investment, their knowledge of the entrepreneur’s high level of personal investment, as well as the entrepreneur’s ability to conduct rigorous market research following the firm’s underperformance, influence investors’ decisions to overlook their sunk cost to persist and reinvest. Furthermore, we find that when the firm's business model can be made less intricate, investors are more likely to be swayed by their sunk costs when deciding to reinvest. Finally, we observe that when UPF has a reputation for corporate social responsibility, investors are willing to support these firms in reinvestments despite having incurred a sunk cost.

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