“A retreat to safety”: Why COVID-19 make firms more risk-averse?

While existing research has explored the impact of COVID-19 on corporate financial performance and managerial behavior, its specific effect on corporate risk-taking (CRT) remains largely unexplored. This study investigates how the uncertainty caused by COVID-19 affected CRT in Chinese listed firms. Employing a Difference-in-Differences (DID) model with 52,792 firm-quarter observations from 3702 Chinese A-listed shares between 2018Q1 and 2021Q4, we find that firms exhibit a retreat to safety, increasing cash holdings by an average of 2.74 % in response to the pandemic. This heightened risk aversion is mediated by a decline in managerial overconfidence, suggesting that the uncertainty of COVID-19 dampened managers' expectations of future returns. This relationship is particularly pronounced in state-owned firms, larger firms, and those operating in highly competitive markets. These findings offer valuable insights into the interplay of external shocks, managerial psychology, and corporate strategic responses, highlighting the importance of incorporating behavioral factors into crisis management strategies.