Differential Ability to Recognize Emerging Developments and Corporate Performance Under Uncertainty

44 Pages Posted: 25 Apr 2013 Last revised: 12 Jan 2014

See all articles by Chia‐Chun Hsieh

Chia‐Chun Hsieh

National Chung Cheng University

Zhiming Ma

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Kirill E. Novoselov

Shanghai University of Finance and Economics

Date Written: April 25, 2013

Abstract

Research in psychology and biology shows that individuals differ in their ability to recognize changes in the environment and that these differences arise as an adaptive response to uncertainty. We argue that the said ability is relevant to decision making under uncertainty. We conduct empirical tests in which we infer the ability to recognize emerging developments from the propensity to take costly precautionary actions in the face of uncertainty (we dub it prudence). Using a large sample of U.S.-listed firms over a thirty-year period, we report that (i ) prudent firms exhibit greater long-term profitability than firms that have never taken precautionary actions, (ii ) the positive association between prudence and profitability monotonically increases in uncertainty, (iii ) prudence does not convey any benefits in low-uncertainty environments, and (iv) prudent firms are more responsive to changes in investment opportunities. The results are consistent with the theoretical predictions.

Keywords: Knightian uncertainty, responsiveness, perceived uncertainty, ambiguity, unawareness, decision analysis

JEL Classification: D81, D83

Suggested Citation

Hsieh, Chia-Chun and Ma, Zhiming and Novoselov, Kirill E., Differential Ability to Recognize Emerging Developments and Corporate Performance Under Uncertainty (April 25, 2013). Available at SSRN: https://ssrn.com/abstract=2256292 or http://dx.doi.org/10.2139/ssrn.2256292

Chia-Chun Hsieh

National Chung Cheng University ( email )

Min-Shiung, Chia-Yi, 621
Taiwan

Zhiming Ma

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Kirill E. Novoselov (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
62
Abstract Views
974
rank
470,989
PlumX Metrics