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Focal points and firm risk
Author(s) -
Cai Ye,
Shefrin Hersh
Publication year - 2018
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12174
Subject(s) - equity (law) , cash flow , focal point , cash , point (geometry) , marketing , economics , actuarial science , business , finance , cardinal point , political science , physics , optics , geometry , mathematics , law
The ‘better than average’ effect suggests that relative industry standing should serve as an important focal point for corporate managers. March and Shapira ( Psychological Review , 99 , 172–183, 1992) develop a framework to analyze the impact of focal points on firms’ risk profiles. This paper uses the March–Shapira model to investigate the relationship between firms’ relative industry standings and their risk profiles. We find that firms’ equity returns display strong March–Shapira effects. When we examine the different firm decisions that impact risk, we find the strong presence of March–Shapira effects in firms’ decisions about operating cash flows, diversifying acquisition activity, working capital, and capital structure.