Hanging in There for Employees: Managerial Prosocial Preferences, Firm Exit Thresholds, and Risk-Taking

60 Pages Posted: 28 Apr 2023

See all articles by Daniel Keum

Daniel Keum

Columbia University - Columbia Business School

Xin Lucy Liu

Columbia University - Columbia Business School

Date Written: January 1, 2023

Abstract

When facing economic setbacks, managers may continue operating due to the concern that exiting may harm employees who lose their jobs. We propose that managers with higher prosocial preferences set lower exit thresholds and avoid risky investments that increase the risk of having to exit. These hypotheses are tested using a multi-method design. Our field study shows that, in responding to intensifying Chinese import competition, prosocial managers (e.g., those who volunteer at charitable organizations, lean non-Republican in political orientation, maintain employee-friendly policies, or are promoted internally) are less likely to exit, divest, and invest in R&D. A manager’s concern for employees mediates the negative effect of prosocial preferences on exit thresholds and risky investments (Experiment 1) and has larger effects when employees face a greater cost of job loss due to the loss of medical insurance (Experiment 2). We show that anticipated guilt is a key component of the prosocial cost (Experiment 3). Our study presents managerial prosocial cost as a critical input to corporate strategy and risk-taking.

Keywords: managers, exits, prosocial behavior, guilt aversion

JEL Classification: D91, G34, J65

Suggested Citation

Keum, Daniel and Liu, Lucy, Hanging in There for Employees: Managerial Prosocial Preferences, Firm Exit Thresholds, and Risk-Taking (January 1, 2023). Available at SSRN: https://ssrn.com/abstract=4420492 or http://dx.doi.org/10.2139/ssrn.4420492

Daniel Keum (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Lucy Liu

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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