Terrorism-Induced Trauma and Corporate Innovation

Abstract

This research studies innovation decisions made by CEOs who have lived through the experience of a terrorist attack during their college years. Consistent with the evidence of terrorist attacks negatively affecting risk aversion and cognitive ability of people documented in the finance and psychology literature, we first find that past terrorism-induced trauma leads to more spending on R&D and less innovation output in an empirical model that controls for any concurrent events of terrorism. Second, we show how terrorism-induced trauma affects risk preference through two distinct emotional channels of anger and fear. Third, while both male and female CEOs suffer damage to their cognitive ability from terrorist attacks, only male CEOs exhibit lower risk aversion. Finally, the psychological impact of terrorism-induced trauma decays over time as evidenced by stronger results for younger CEOs and varies across CEOs' cultural origins, the results being most relevant for CEOs originating from Asia.