Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes

Olivier Dessaint () and Adrien Matray ()

No 1026, HEC Research Papers Series from HEC Paris

Abstract: 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.

Keywords: managers; overreact; salient risk (search for similar items in EconPapers)
JEL-codes: D03 D81 D83 G02 G31 G39 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2014-02-17
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1026

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