Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-12-03T20:48:48.206Z Has data issue: false hasContentIssue false
  • English
  • Français

Corporate Risk Culture

Published online by Cambridge University Press:  27 December 2017

Yihui Pan ,
Stephan Siegel  and
Tracy Yue Wang
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the formation and evolution of corporate risk culture, that is, the preferences toward risk and uncertainty shared by a firm’s leaders, as well as its effect on corporate policies. We document persistent commonality in risk attitudes inside firms, which arises through the selection of leaders with similar preferences and is rooted in the founders’ risk attitudes. Changes in corporate risk culture over time affect corporate investment policies, whereas cross-sectional differences in founders’ risk attitudes, that is, firms’ initial risk culture, contribute to differences across firms in persistent firm policies, such as research and development intensity.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2327 - 2367
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank an anonymous referee and Jennifer Conrad (the editor) for valuable suggestions and Anup Agrawal, Daniel Benjamin, Peter Bossaerts, Pierre Chaigneau, Bhagwan Chowdhry, Jeffrey Coles, Michael Cooper, Amy Dittmar, Ran Duchin, Mara Faccio, Mark Grinblatt, Charlie Hadlock, Campbell Harvey, Jean Helwege, David Hirshleifer, Han Kim, Samuli Knüpfer, Yun Liu, Ulrike Malmendier, Amiyatosh Purnanandam, Denis Sosyura, Nico Voigtländer, and seminar participants at the 2016 American Finance Association Annual Meeting, Chinese University of Hong Kong, the 2016 China International Conference in Finance Meeting, Cheung Kong Graduate School of Business, Drexel University, the 2015 European Finance Association Meeting, the 2016 Florida State University SunTrust Beach Conference, HEC (Montréal), Goethe University Frankfurt, Iowa State University, the 2015 Indian School of Business Summer Research Conference, Leibniz Universität Hannover, the 2014 National Bureau of Economic Research (NBER) Behavioral Finance Meeting, the 2015 NBER Culture and Economics Meeting, Tsinghua PBC School of Finance, University of California at Riverside, University of Hong Kong, University of Michigan, University of Minnesota, University of Utah, University of Washington, Vienna University of Economics and Business, and York University for helpful comments. We thank Vineet Bhagwat, Joey Engelberg, and Romain Wacziarg for sharing their data with us, and the behavioral research committee at the David Eccles School of Business, University of Utah, for providing research funding. We also thank Masood Ahmed, Aaron Burt, Luwam Gabreselassie, Rui Han, Seong Lee, and Yongjian Mu for excellent research assistance. Any errors or omissions are our own.

References

Adhikari, B. K., and Agrawal, A.. “Religion, Gambling Attitudes and Corporate Innovation.” Journal of Corporate Finance, 37 (2016), 229–248.CrossRefGoogle Scholar
Ahern, K. R.; Duchin, R.; and Shumway, T.. “Peer Effects in Risk Aversion and Trust.” Review of Financial Studies, 27 (2014), 3213–3240.CrossRefGoogle Scholar
Becker, A.; Dohmen, T.; Enke, B.; and Falk, A.. “The Ancient Origins of the Cross-Country Heterogeneity in Risk Preferences.” Working Paper, University of Bonn (2015).Google Scholar
Beckmann, D.; Menkhoff, L.; and Suto, M.. “Does Culture Influence Asset Managers’ Views and Behavior?” Journal of Economic Behavior and Organization, 67 (2008), 624–643.CrossRefGoogle Scholar
Bernile, G.; Bhagwat, V.; and Rau, P. R.. “What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior.” Journal of Finance, 72 (2017), 167–206.CrossRefGoogle Scholar
Bloom, N.“Fluctuations in Uncertainty.” Journal of Economic Perspectives, 28 (2014), 153–176.Google Scholar
Cain, M. D., and McKeon, S. B.. “CEO Personal Risk-Taking and Corporate Policies.” Journal of Financial and Quantitative Analysis, 51 (2016), 139–164.Google Scholar
Camerer, C., and Weber, M.. “Recent Developments in Modeling Preferences: Uncertainty and Ambiguity.” Journal of Risk and Uncertainty, 5 (1992), 325–370.Google Scholar
Cameron, A. C., and Miller, D. L.. “A Practitioners Guide to Cluster-Robust Inference.” Journal of Human Resources, 50 (2015), 317–372.Google Scholar
Chambers, D.; Jennings, R.; and Thompson, R. B. II. “Excess Returns to R&D-Intensive Firms.” Review of Accounting Studies, 7 (2002), 133–158.Google Scholar
Chen, M. K.“The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets.” American Economic Review, 103 (2013), 690–731.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, 27 (2014), 1751–1796.Google Scholar
Cozzi, G., and Giordani, P.. “Ambiguity Attitude, R&D Investments and Economic Growth.” Journal of Evolutionary Economics, 21 (2011), 303–319.CrossRefGoogle Scholar
Denis, D. J., and Denis, D. K.. “Performance Changes following Top Management Dismissals.” Journal of Finance, 50 (1995), 1029–1057.Google Scholar
Dittmar, A. K., and Duchin, R.. “The Dynamics of Cash.” Working Paper, University of Michigan (2011).Google Scholar
Dittmar, A. K., and Duchin, R.. “Looking in the Rearview Mirror: The Effect of Managers’ Professional Experience on Corporate Financial Policy.” Review of Financial Studies, 29 (2016), 565–602.Google Scholar
Dixit, A. K., and Pindyck, R. S.. Investment under Uncertainty. Princeton, NJ: Princeton University Press (1994).CrossRefGoogle Scholar
Doraszelski, U., and Jaumandreu, J.. “R&D and Productivity: Estimating Endogenous Productivity.” Review of Economic Studies, 80 (2013), 1338–1383.CrossRefGoogle Scholar
Du, Q.; Yu, F.; and Yu, X.. “Cultural Proximity and the Processing of Financial Information.” Journal of Financial and Quantitative Analysis, 52 (2017), 2703–2726.Google Scholar
Eisenberg, A. E.; Baron, J.; and Seligman, M. E. P.. “Individual Differences in Risk Aversion and Anxiety.” Working Paper, University of Pennsylvania (1996).Google Scholar
Eisfeldt, A., and Kuhnen, C.. “CEO Turnover in a Competitive Assignment Framework.” Journal of Financial Economics, 109 (2013), 351–372.Google Scholar
Epstein, L. G., and Schneider, M.. “Ambiguity and Asset Markets.” Annual Review of Financial Economics, 2 (2010), 315–346.CrossRefGoogle Scholar
Faccio, M.; Marchica, M.-T.; and Mura, R.. “CEO Gender and Corporate Risk-Taking.” Working Paper, Purdue University (2015).Google Scholar
Fee, C. E., and Hadlock, C. J.. “Management Turnover across the Corporate Hierarchy.” Journal of Accounting and Economics, 37 (2004), 3–38.Google Scholar
Fee, C. E.; Hadlock, C. J.; Huang, J.; and Pierce, J. R.. “Industry Conditions and CEO Labor Markets: New Evidence on Relative Performance Evaluation.” Working Paper, Michigan State University (2014).Google Scholar
Fee, C. E.; Hadlock, C. J.; and Pierce, J. R.. “Managers with and without Style: Evidence Using Exogenous Variation.” Review of Financial Studies, 26 (2013), 567–601.Google Scholar
Fehr, E.“On the Economics and Biology of Trust.” Journal of the European Economic Association, 7 (2009), 235–266.CrossRefGoogle Scholar
Fernández, R., and Fogli, A.. “Fertility: The Role of Culture and Family Experience.” Journal of the European Economic Association, 4 (2006), 552–561.Google Scholar
Fernández, R., and Fogli, A.. “Culture: An Empirical Investigation of Beliefs, Work, and Fertility.” American Economic Journal: Macroeconomics, 1 (2009), 146–177.Google Scholar
Frank, M. Z., and Goyal, V. K.. “Capital Structure Decisions: Which Factors Are Reliably Important?” Financial Management, 38 (2009), 1–37.Google Scholar
Garlappi, L.; Giammarino, R.; and Lazrak, A.. “Ambiguity in Corporate Finance: Real Investment Dynamics.” Working Paper, University of British Columbia (2013).Google Scholar
Giavazzi, F.; Petkov, I.; and Schiantarelli, F.. “Culture: Persistence and Evolution.” Working Paper, Boston College (2014).Google Scholar
Gompers, P.; Mukharlyamov, V.; and Xuan, Y.. “The Cost of Friendship.” Journal of Financial Economics, 119 (2016), 626–644.Google Scholar
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2013), 103–121.Google Scholar
Grinblatt, M., and Keloharju, M.. “How Distance, Language, and Culture Influence Stockholdings and Trades.” Journal of Finance, 56 (2001), 1053–1073.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Does Culture Affect Economic Outcomes?” Journal of Economic Perspectives, 20 (2006), 23–48.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Trusting the Stock Market.” Journal of Finance, 63 (2008), 2557–2600.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Corporate Culture, Societal Culture, and Institutions.” American Economic Review, 105 (2015a), 336–339.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “The Value of Corporate Culture.” Journal of Financial Economics, 117 (2015b), 60–76.Google Scholar
Hammarström, H.; Forkel, R.; Haspelmath, M.; and Bank, S.. Glottolog 2.7. Jena, Germany: Max Planck Institute for the Science of Human History (2016).Google Scholar
Hartley, C. A., and Phelps, E. A.. “Anxiety and Decision-Making.” Biological Psychiatry, 72 (2012), 113–118.Google Scholar
Hayes, R. M.; Oyer, P.; and Schaefer, S.. “Coworker Complementarity and the Stability of Top-Management Teams.” Journal of Law, Economics, and Organization, 22 (2006), 184–212.Google Scholar
Hermalin, B. E.“Toward an Economic Theory of Leadership: Leading by Example.” American Economic Review, 88 (1998), 1188–1206.Google Scholar
Hirschey, M., and Weygandt, J. J.. “Amortization Policy for Advertising and Research and Development Expenditures.” Journal of Accounting Research, 23 (1985), 326–335.CrossRefGoogle Scholar
Hirshleifer, D.; Low, A.; and Teoh, S. H.. “Are Overconfident CEOs Better Innovators?” Journal of Finance, 67 (2012), 1457–1498.CrossRefGoogle Scholar
Hofstede, G. Culture’s Consequences: International Differences in Work-Related Values. Beverly Hills, CA: Sage (1980).Google Scholar
Hofstede, G. Cultures and Organizations: Software of the Mind. London, UK: McGraw-Hill (1991).Google Scholar
Hofstede, G. Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations across Nations. Thousand Oaks, CA: Sage (2001).Google Scholar
Hofstede, G.; Hofstede, G. J.; and Minkov, M.. Cultures and Organizations: Software of the Mind. 3rd ed. New York, NY: McGraw-Hill (2010).Google Scholar
Hofstede, G., and McCrae, R. R.. “Personality and Culture Revisited: Linking Traits and Dimensions of Culture.” Cross-Cultural Research, 38 (2004), 52–88.Google Scholar
Ilut, C. L., and Schneider, M.. “Ambiguous Business Cycles.” American Economic Review, 104 (2014), 2368–2399.CrossRefGoogle Scholar
Izhakian, Y.“Ambiguity Measurement.” Working Paper, New York University (2012).Google Scholar
Jordan, P.“Großgliederung Europas nach Kulturräumlichen Kriterien.” Europa Regional, 13 (2005), 162–173.Google Scholar
Karolyi, G. A.“The Gravity of Culture for Finance.” Journal of Corporate Finance, 41 (2016), 610–625.Google Scholar
Kerr, W. R., and Lincoln, W. F.. “The Supply Side of Innovation: H-1B Visa Reforms and U.S. Ethnic Invention.” Journal of Labor Economics, 28 (2010), 473–508.CrossRefGoogle Scholar
Kim, E. H., and Lu, Y.. “CEO Ownership, External Governance, and Risk-Taking.” Journal of Financial Economics, 102 (2011), 272–292.Google Scholar
Knight, F. H. Risk, Uncertainty and Profit. Boston, MA: Houghton Mifflin (1921).Google Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R. W.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.CrossRefGoogle Scholar
KPMG. “Never Again? Risk Management in Banking beyond the Credit Crisis” (2009).Google Scholar
Kreps, D. M.“Corporate Culture and Economic Theory.” In Perspectives on Positive Political Economy, Alt, J. E. and Shepsle, K. A., eds. Cambridge, UK: Cambridge University Press (1990).Google Scholar
Leary, M. T., and Roberts, M. R.. “Do Peer Firms Affect Corporate Financial Policy?” Journal of Finance, 69 (2014), 139–178.Google Scholar
Lee, S.“Knightian Uncertainty and Capital Structure: Theory and Evidence.” Working Paper, George Mason University (2015).Google Scholar
Lemmon, M. L.; Roberts, M. R.; and Zender, J. F.. “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.Google Scholar
Leroy, S. F., and Singell, L. D.. “Knight on Risk and Uncertainty.” Journal of Political Economy, 95 (1987), 394–406.Google Scholar
Lev, B., and Sougiannis, T.. “The Capitalization, Amortization, and Value-Relevance of R&D.” Journal of Accounting and Economics, 21 (1996), 107–138.CrossRefGoogle Scholar
Liu, X.“Corruption Culture and Corporate Misconduct.” Journal of Financial Economics, 122 (2016), 307–327.Google Scholar
MacKay, P., and Phillips, G. M.. “How Does Industry Affect Firm Financial Structure?” Review of Financial Studies, 18 (2005), 1433–1466.Google Scholar
Malerba, F.; Orsenigo, L.; and Peretto, P.. “Persistence of Innovative Activities, Sectoral Patterns of Innovation and International Technological Specialization.” International Journal of Industrial Organization, 15 (1997), 801–826.Google Scholar
Malmendier, U.; Tate, G.; and Yan, J.. “Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies.” Journal of Finance, 66 (2011), 1687–1733.Google Scholar
Maner, J. K.; Richey, J. A.; Cromer, K.; Mallott, M.; Lejuez, C. W.; Joiner, T. E.; and Schmidt, N. B.. “Dispositional Anxiety and Risk-Avoidant Decision-Making.” Personality and Individual Differences, 42 (2007), 665–675.Google Scholar
O’Reilly, C. A.“Corporations, Cultures, and Commitment: Motivation and Social Control in Organizations.” California Management Review, 31 (1989), 9–25.CrossRefGoogle Scholar
Paulus, M. P.; Rogalsky, C.; Simmons, A.; Feinstein, J. S.; and Stein, M. B.. “Increased Activation in the Right Insula during Risk-Taking Decision Making Is Related to Harm Avoidance and Neuroticism.” NeuroImage, 19 (2003), 1439–1448.Google Scholar
Petersen, M. A.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Popadak, J.“A Corporate Culture Channel: How Increased Shareholder Governance Reduces Firm Value.” Working Paper, Duke University (2014).Google Scholar
Rieger, M. O.; Wang, M.; and Hens, T.. “Risk Preferences around the World.” Management Science, 61 (2014), 637–648.CrossRefGoogle Scholar
Schein, E. H. Organizational Culture and Leadership. San Francisco, CA: Jossey-Bass (1985).Google Scholar
Shane, S.“Cultural Influences on National Rates of Innovation.” Journal of Business Venturing, 8 (1993), 59–73.Google Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.Google Scholar
Sutton, J.“Flexibility, Profitability and Survival in an (Objective) Model of Knightian Uncertainty.” Working Paper, London School of Economics (2004).Google Scholar
Syverson, C.“What Determines Productivity?” Journal of Economic Literature, 49 (2011), 326–365.Google Scholar
Thompson, S. B.“Simple Formulas for Standard Errors That Cluster by Both Firm and Time.” Journal of Financial Economics, 99 (2011), 1–10.Google Scholar
Tran, L. Compassionate Vietnamese American CEOs: How Six High-Tech Entrepreneurs Achieve Bottom Line Success by Leading with Their Hearts. Cupertino, CA: Happy About (2013).Google Scholar
van den Steen, E.“Organizational Beliefs and Managerial Vision.” Journal of Law, Economics, and Organization, 21 (2005), 256–283.Google Scholar
van den Steen, E.“On the Origin of Shared Beliefs (and Corporate Culture).” RAND Journal of Economics, 41 (2010), 617–648.Google Scholar
Welch, I.“Capital Structure and Stock Returns.” Journal of Political Economy, 112 (2004), 106–132.Google Scholar
Yonker, S. E.“Geography and the Market for CEOs.” Management Science, 63 (2017), 609–630.CrossRefGoogle Scholar