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Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes

Author

Listed:
  • Olivier Dessaint

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Adrien Matray

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

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

  • Olivier Dessaint & Adrien Matray, 2013. "Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes," Working Papers hal-02058251, HAL.
    • Handle: RePEc:hal:wpaper:hal-02058251
    DOI: 10.2139/ssrn.2358186
    as

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