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Do managers overreact to salient risks? Evidence from hurricane strikes

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  • Dessaint, Olivier
  • Matray, Adrien

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.

Suggested Citation

  • Dessaint, Olivier & Matray, Adrien, 2017. "Do managers overreact to salient risks? Evidence from hurricane strikes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 97-121.
  • Handle: RePEc:eee:jfinec:v:126:y:2017:i:1:p:97-121
    DOI: 10.1016/j.jfineco.2017.07.002
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    More about this item

    Keywords

    Behavioral bias; Risk perception; Corporate cash holdings; Availability heuristic; Risk management;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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