Do managers overreact to salient risks? Evidence from hurricane strikes

Olivier Dessaint, Adrien Matray

Research output: Contribution to journalArticle

15 Scopus citations

Abstract

We study how managers respond to hurricane events when their firms are located in the neighborhood of the disaster area. We find that the sudden shock to the perceived liquidity risk leads managers to increase corporate cash holdings and to express more concerns about hurricane risk in 10-Ks/10-Qs, even though the actual risk remains unchanged. Both effects are temporary. Over time, the perceived risk decreases, and the bias disappears. The distortion between perceived and actual risk is large, and the increase in cash is suboptimal. Overall, managerial reaction to hurricanes is consistent with salience theories of choice.

Original languageEnglish (US)
Pages (from-to)97-121
Number of pages25
JournalJournal of Financial Economics
Volume126
Issue number1
DOIs
StatePublished - Oct 2017

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Keywords

  • Availability heuristic
  • Behavioral bias
  • Corporate cash holdings
  • Risk management
  • Risk perception

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