Corporate Risk Culture

Abstract

We examine the formation and evolution of corporate risk culture, i.e., the preferences towards 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, while cross-sectional differences in founders' risk attitudes, i.e., firms' initial risk culture, contribute to differences across firms in persistent firm policies, such as R&D intensity.

Keywords: corporate culture, cultural heritage, risk preference, uncertainty avoidance, corporate investment, CEO selection, directors, executives