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Do managers overreact to salient risks? Evidence from hurricane strikes

Olivier Dessaint and Adrien Matray

Journal of Financial Economics, 2017, vol. 126, issue 1, 97-121

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.

Keywords: Behavioral bias; Risk perception; Corporate cash holdings; Availability heuristic; Risk management (search for similar items in EconPapers)
JEL-codes: D03 D81 D83 G02 G31 G39 (search for similar items in EconPapers)
Date: 2017
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