Terrorism Risk and the Mediating Role of Manager Experience: Empirical Evidence*

Abstract

Firms in developing countries face security risks and suffer from weak institutional support. In theory, managerial talent is pivotal in firms' assessment of external risks and implementing operational changes in response. Using managers' experience as a proxy for managerial talent, this study estimates its mediating role in determining firms' security costs in a threatened environment. The study uses survey data from 1700 formal firms covering 13 sectors and 17 locations in Pakistan. The nonlinear effects are estimated at different percentiles of the distribution of managerial experience. The main finding is a positive effect of the risk of terrorism on firm security costs, which is decreasing in managerial experience. This effect is robust against alternative specifications. The issue of endogeneity of the variables of interest is tackled using the instrumental variables approach. The implications and limitations of the findings are noted.