Aspiration level, probability of success, and stock returns: an empirical test

Abstract Decision-makers usually have an aspiration level, a target, or a benchmark they aim to achieve. This behavior can be rationalized within the expected utility framework, which incorporates the probability of success (achieving the aspiration level) as an important aspect of decision-making. Motivated by these theories, this study defines the probability of success as the number of days a firm’s return outperformed its benchmark in the portfolio formation month. This study uses portfolio-level and firm-level analyses, revealing an economically substantial and statistically significant relationship between the probability of success and expected stock returns, even after controlling for common risk factors and various characteristics. Additional analyses support the behavioral theory of the firm, which posits that firms act to achieve short-term aspiration levels.