Impact from a distance: Emotionally attached-place disasters and corporate risk-taking

Abstract

Prior literature examines the impact of geographically close natural disasters on top executives' risk perceptions. Using Chinese data, this study investigates how corporate risk-taking is influenced by psychologically close disasters, which may be geographically distant. Specifically, we focus on major natural disasters that occur in places emotionally attached to CEOs or chairmen, including their hometowns and college locations. We show that top executives increase corporate risk-taking, manifested in higher return volatility and riskier corporate policies, following disasters in their geographically distant places of attachment, while no such effect is observed for close places of attachment. This effect continues into the next four to eight quarters. The increase in risk-taking is amplified when the disaster event is more salient and when the executive has a stronger connection to their distant attached places, and it is weaker for executives with better emotional resilience. Collectively, our study sheds additional light on the important role of affective connections in corporate risk decisions.