Do managers overreact to salient risks? Evidence from hurricane strikes

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,...

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Bibliographic Details
Published in:Journal of financial economics 2017-10, Vol.126 (1), p.97-121
Main Authors: Dessaint, Olivier, Matray, Adrien
Format: Article
Language:English
Subjects:
Availability heuristic
Behavioral bias
Bias
Corporate cash holdings
Distortion
Hurricanes
Neighborhoods
Risk
Risk management
Risk perception
Studies
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2017.07.002