Thinking of peace when rich: The effect of industry growth on corporate risk-taking

We investigate the unique role and mechanisms of industry growth in firms’ risk-taking policies. We find that industry growth is negatively associated with corporate risk-taking, consistent with the prospect theory that a high-growth industry gives firms a superior external environment, which may ca...

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Bibliographic Details
Published in:China journal of accounting research 2022-06, Vol.15 (2), p.100225, Article 100225
Main Authors: Kong, Xiangting, Tan, Jinsong, Zhang, Jingxin
Format: Article
Language:English
Subjects:
Corporate policies
Industry growth
Prospect theory
Risk-taking
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Summary:We investigate the unique role and mechanisms of industry growth in firms’ risk-taking policies. We find that industry growth is negatively associated with corporate risk-taking, consistent with the prospect theory that a high-growth industry gives firms a superior external environment, which may cause them to refrain from corporate risk-taking as in the saying “thinking of peace when rich.” This correlation is stronger for product market leaders, industries encouraged by industry policies and industries that receive more government support. Firms reduce risk-taking through various corporate policies, including long-term, high-value investments, operational efficiency and cash holdings in response to high industry growth. Overall, our results are consistent with industry growth negatively affecting corporate risk-taking.
ISSN:1755-3091
2214-1421
DOI:10.1016/j.cjar.2022.100225