A Risky Game or a Safe Bet? The Role of Firm Status in Shaping Corporate Investments

Abstract

This study examines the relationship between status and uncertainty-increasing and uncertainty-decreasing investments. Focusing specifically on financial uncertainty, we argue that middle-status firms engage in more uncertainty-increasing investments than low- and high-status firms, whereas higher-status firms engage in more uncertainty-decreasing investments than lower-status firms. Regardless of whether the focus is on uncertainty-increasing investments or uncertainty-decreasing investments, the extent to which firms perform above their historical and social aspirations mitigates the relationship between status and uncertainty-increasing and -decreasing investments. We find broad support for our arguments in a longitudinal sample of privately-owned Chinese firms traded on the Shanghai and Shenzhen stock exchanges. Specifically, social aspirations in the form of same-industry comparisons mitigates the inverted-U relationship between status and uncertainty-increasing investments, whereas social aspirations in the form of both same-industry and same-status comparisons mitigates the linear relationship between status and uncertainty-decreasing investments.