Local risk preference and corporate policies: evidence from M&A

Jeffrey (Jun) Chen, Fariz Huseynov, Bochen Li and Wei Zhang

Applied Economics, 2021, vol. 53, issue 45, 5158-5176

Abstract: This article examines whether and how the firms’ mergers and acquisitions (M&A) policies are influenced by the risk preference of local community where the firms’ headquarters are located. By utilizing the different preferences towards risk-taking from the county-level religiosity-based measure, we document a significantly positive relation between the local risk preference and the likelihood of firms’ M&A. Firms whose headquarters are located in the counties with a higher degree of risk tolerance are more likely to engage in takeovers or acquire riskier targets. Local risk preference also results in wealth transfer during M&A that reduces acquirers’ equity value. When interacting with firm CEOs’ career concern and financial compensation, we find that managerial risk-taking incentive can be significantly affected by the local risk preference, suggesting an important economic interplay between the social norms and financial decision-making.

Date: 2021
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DOI: 10.1080/00036846.2021.1921688

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