Corporate Risk-Taking, Returns and the Nature of Major Shareholders: Evidence from Prospect Theory
Research in International Business and Finance 42, 900-911, 2017
37 Pages Posted: 15 Sep 2017 Last revised: 14 Oct 2017
Date Written: September 12, 2017
This paper analyzes the relation between corporate risk-taking and firm performance for a sample of 791 firms from 21 OECD countries over the period 2001–2013. Following a critical realist paradigm, we use prospect theory to posit that corporate risk-taking depends on the gap between target and expected firm performance. Consistent with this approach, we find a U-shaped relation between corporate risk-taking and firm returns. Firms adopt an attitude of risk-seeking when the expected performance is below target performance. Conversely, in line with traditional financial literature, the relation between risk and return becomes positive when the performance exceeds the target. This relation is affected by the economic context and the nature of the major shareholder: Firms controlled by families or institutional investors react more conservatively (taking or avoiding risk) to changes in corporate results.
Keywords: Corporate risk-taking, firm performance, prospect theory, family firms, institutional investors
JEL Classification: G15, G32, G34
Suggested Citation: Suggested Citation