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Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes

  • Dessaint , Olivier

    ()

  • Matray , Adrien

    ()

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    Consistent with salience theories of choice, we find that managers overreact to salient risks. We study how managers respond to the occurrence of a hurricane event 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 the amount of corporate cash holdings, even though the real liquidity risk remains unchanged. Such an increase in cash holdings is only temporary. Over time, the perceived risk decreases, and the bias disappears. This bias is costly for shareholders because it leads to higher retained earnings and negatively impacts firm value by reducing the value of cash. We examine alternative explanations for our findings. In particular, we find only weak evidence that the possibility of risk learning or regional spillover effects may influence our results.

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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358186
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    Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 1026.

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    Length: 64 pages
    Date of creation: 17 Feb 2014
    Date of revision:
    Handle: RePEc:ebg:heccah:1026
    Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
    Web page: http://www.hec.fr/

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