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Article

Corporate risk-taking, returns and the nature of major shareholders: Evidence from prospect theory

Research in International Business and Finance. 2017. Vol. 42. P. 900-911.
Lopez Iturriaga F. J., Díez-Esteban J. M., García-Gómez C. D., Santamaría-Mariscal M.

This paper analyses the relation between corporate risk-taking and firm performance for a sample of international listed firms over the period 2001–2013. We consider the approaches on individual behavior (specifically prospect theory) to propose a U-shaped relation between corporate risk-taking and firm returns. We find that firms adopt an attitude of risk-seeking when the expected performance is below a target performance (to avoid an anticipated loss) and an attitude of risk averse when the performance exceeds that target. This relation is affected by the economic context and the nature of the major shareholder: Firms controlled by families or institutional investors react more conservatively (taking or avoiding risk) to changes in corporate results. We are aware that our results, are affected by both the theoretical model and the temporal and spatial framework used.