Focal Points and Firm Risk

24 Pages Posted: 17 Sep 2018

See all articles by Ye Cai

Ye Cai

Santa Clara University - Leavey School of Business

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: September 2018

Abstract

The ‘better than average’ effect suggests that relative industry standing should serve as an important focal point for corporate managers. March and Shapira (Psychological Review, 99, 172–183, 1992) develop a framework to analyze the impact of focal points on firms’ risk profiles. This paper uses the March–Shapira model to investigate the relationship between firms’ relative industry standings and their risk profiles. We find that firms’ equity returns display strong March–Shapira effects. When we examine the different firm decisions that impact risk, we find the strong presence of March–Shapira effects in firms’ decisions about operating cash flows, diversifying acquisition activity, working capital, and capital structure.

Keywords: aspiration, ‘better than average’ effect, corporate risk‐taking, focal points

Suggested Citation

Cai, Ye and Shefrin, Hersh, Focal Points and Firm Risk (September 2018). European Financial Management, Vol. 24, Issue 4, pp. 521-544, 2018. Available at SSRN: https://ssrn.com/abstract=3248611 or http://dx.doi.org/10.1111/eufm.12174

Ye Cai (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Hersh Shefrin

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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