Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes

60 Pages Posted: 22 Nov 2013 Last revised: 30 Jun 2017

Date Written: October 1, 2016

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.

JEL Classification: D03, D81, D83, G02, G31, G39

Suggested Citation

Dessaint, Olivier and Matray, Adrien, Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes (October 1, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2358186 or http://dx.doi.org/10.2139/ssrn.2358186

Olivier Dessaint (Contact Author)

INSEAD

Boulevard de Constance
77305 Fontainebleau Cedex
France

Adrien Matray

Princeton University ( email )

Bendheim Center for Finance
26 Prospect Avenue
Princeton, NJ 08540
United States

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