1. Do managers overreact to salient risks? Evidence from hurricane strikes
- Author
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Olivier Dessaint, Adrien Matray, Groupement de Recherche et d'Etudes en Gestion à HEC (GREGH), Ecole des Hautes Etudes Commerciales (HEC Paris)-Centre National de la Recherche Scientifique (CNRS), and HEC Paris Research Paper Series
- Subjects
jel:D81 ,Economics and Econometrics ,Strategy and Management ,Retained earnings ,media_common.quotation_subject ,jel:D83 ,Monetary economics ,JEL: D - Microeconomics/D.D8 - Information, Knowledge, and Uncertainty/D.D8.D83 - Search • Learning • Information and Knowledge • Communication • Belief • Unawareness ,JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G31 - Capital Budgeting • Fixed Investment and Inventory Studies • Capacity ,jel:G02 ,jel:D03 ,Spillover effect ,Accounting ,0502 economics and business ,050207 economics ,Risk management ,media_common ,managers ,overreact ,salient risk ,050208 finance ,business.industry ,05 social sciences ,Enterprise value ,JEL: D - Microeconomics/D.D8 - Information, Knowledge, and Uncertainty/D.D8.D81 - Criteria for Decision-Making under Risk and Uncertainty ,jel:G31 ,Liquidity risk ,Risk perception ,jel:G39 ,Shock (economics) ,JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G39 - Other ,Cash ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,business ,Finance - Abstract
Consistent with salience theories of choice, we find that managers overreact to salient risks. We study how managers respond to the occurrence of a hurricane event when their firms are located in the neighborhood of the disaster area. We find that the sudden shock to the perceived liquidity risk leads managers to increase the amount of corporate cash holdings, even though the real liquidity risk remains unchanged. Such an increase in cash holdings is only temporary. Over time, the perceived risk decreases, and the bias disappears. This bias is costly for shareholders because it leads to higher retained earnings and negatively impacts firm value by reducing the value of cash. We examine alternative explanations for our findings. In particular, we find only weak evidence that the possibility of risk learning or regional spillover effects may influence our results.
- Published
- 2017