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

See all articles by Jose Maria Diez Esteban

Jose Maria Diez Esteban

University of Burgos

Conrado DiegoGarcía-Gómez

University of Valladolid

Félix J. López-Iturriaga

University of Valladolid - Department of Financial Economics and Accounting; National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy

Marcos Santamaría-Mariscal

University of Burgos

Date Written: September 12, 2017

Abstract

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

Diez Esteban, Jose Maria and DiegoGarcía-Gómez, Conrado and Lopez-Iturriaga, Felix Javier and Santamaría-Mariscal, Marcos, Corporate Risk-Taking, Returns and the Nature of Major Shareholders: Evidence from Prospect Theory (September 12, 2017). Research in International Business and Finance 42, 900-911, 2017. Available at SSRN: https://ssrn.com/abstract=3035966 or http://dx.doi.org/10.2139/ssrn.3035966

Jose Maria Diez Esteban

University of Burgos ( email )

Hospital del Rey, s/n
Burgos, 09001
Spain

Conrado DiegoGarcía-Gómez

University of Valladolid

8 C/Plaza de Santa Cruz
Valladolid, Valladolid 47002
Spain

Felix Javier Lopez-Iturriaga (Contact Author)

University of Valladolid - Department of Financial Economics and Accounting ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)

HOME PAGE: http://www2.eco.uva.es/flopez

National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy ( email )

Lebedeva,27
Perm, Perm 614070
Russia

Marcos Santamaría-Mariscal

University of Burgos ( email )

Plaza Infanta Elena
Burgos, Burgos 09001
Spain
34 947 258968 (Phone)

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