Economic Preferences Over Risk-Taking and Corporate Finance

Abstract

We contend that economic preferences over risk-taking in different subnational regions worldwide affect fundamental aspects of firms’ corporate financing, namely financing costs and capital structure. We study this hypothesis, by hand-matching firms’ regions worldwide with the corresponding regional economic risk-taking preferences. Our baseline results show that credit and bond pricing increase with higher risk-taking preferences, whereas such preferences yield lower ratios of book leverage and short-term debt. We backup our baseline results with an instrumental variables approach, which is based on the premise that high-yield agricultural societies in the pre-industrial era exhibit low risk-taking preferences.

Keywords: Economic preferences; Risk-taking; Financing costs; Loan spreads; Bond spreads; Capital structure

JEL Classification: G21; G32; G41; Z13