Do managers overreact to salient risks? Evidence from hurricane strikes
Olivier Dessaint（Rotman School of Management, University of Toronto）, Adrien Matray（Bendheim Center for Finance, Princeton University）
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