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Managerial Risk Attitudes and Firm Performance in Ghanaian Manufacturing: an Empirical Analysis Based on Experimental Data

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  • MÃ¥ns Söderbom
  • Catherine Pattillo
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    Abstract

    Ghanaian manufacturing firms face a highly risky environment. Firms may attempt to manage these risks by undertaking production, input, and investment strategies designed to lower profit variability. Mean-variance analysis implies, however, that these strategies involve a trade-off with lower expected profits. This paper investigates the extent to which more risk averse managers who face high risks attempt to smooth profits at the expense of lower average profits. We use data from the Ghana Manufacturing Enterprise Survey (GMES) 1994-95, and a specialised component designed to measure managers’ risk attitudes using an experimental gambling approach with real monetary payoffs. Joint estimation of profit and profit variance functions which control for unobserved heterogeneity support model predictions. Firms with more risk averse managers who face high risks have lower profit rate variability and lower mean profit rates. These mean and variance differences are economically important and statistically significant.

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    File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/20-17text.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2000-17.

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    Date of creation: 01 Jul 2000
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    Handle: RePEc:oxf:wpaper:wps/2000-17

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    Related research

    Keywords: Ghanaian manufacturing; risk aversion; profit function; variance function.;

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    1. Nakamura, Tamotsu, 1999. "Risk-aversion and the uncertainty-investment relationship: a note," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 38(3), pages 357-363, March.
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    8. Westley, Glenn D. & Shaffer, Sherrill, 1999. "Credit union policies and performance in Latin America," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(9), pages 1303-1329, September.
    9. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, Econometric Society, vol. 52(2), pages 271-320, March.
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    11. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 15(2), pages 180-94, April.
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    Cited by:
    1. Cucculelli, Marco & Ermini, Barbara, 2013. "Risk attitude, product innovation, and firm growth. Evidence from Italian manufacturing firms," Economics Letters, Elsevier, Elsevier, vol. 118(2), pages 275-279.

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