Tracy Yue Wang - University of Minnesota, Stephan Siegel - University of Washington and Yihui Pan - University of Utah

Title: Corporate Risk Culture

Abstract We examine the formation and evolution of firms’ attitudes towards risk and uncertainty, characterized by the shared risk preferences of corporate executives and directors, as well as their effect on corporate policies. We document the existence of commonality in risk preferences inside the firm, which arises as CEOs are selected to match the risk attitudes of existing directors and executives, and CEOs in turn shape the composition of executive teams and boards to be more aligned with their own risk preferences. Selection also gives rise to persistence in corporate risk attitudes over time and across generations of leadership, tracing the origin of culture back to the founder’s risk attitude. Firms’ risk-taking policies are significantly associated with corporate risk culture. In the cross section, difference in founders’ risk attitudes is an important determinant of persistent differences in corporate risk-taking. Finally, divergence in risk preferences among corporate leaders affects real decisions in the firm, and is associated with more use of formal incentives in coordinating incentives.