Emotional Expressions Predict Risky Decisions by S&P 500 Executives

Abstract

Laboratory experiments conducted on college students suggest that emotions influence risk-taking during decisions-making. As the capacity to measure emotions in the field has been limited, however, it is unclear whether findings can be generalized to real world situations such as high-stakes managerial decisions. We examine the relationship between emotional expressions of executives of the world’s largest firms and subsequent high-stake risky decisions about whether to conduct mergers and acquisitions (M&A). By performing text-based sentiment analysis on the quarterly earnings conference calls of these firms (N=15,555), we reveal that the negative emotional expressions predicts less risk taking (i.e., fewer M&A deals), above fundamental financial variables. The effect is driven by the expression of sadness and fear, emotions that involve appraisals of uncertainty and lack of control, in line with the predictions of exiting theories of emotion and risk taking. We discuss the implications of our findings for managerial practice.