Which formula for corporate risk-taking around the world? Exploring happiness as the “black box”

Thao Phuong Tran,Anh-Tuan Le

doi:10.1108/jabes-01-2021-0009

Abstract

PurposeThis paper examines how the degree of happiness affects corporate risk-taking and the moderating influence of family ownership of firms on this relationship.Design/methodology/approachThe authors use an international sample of 17,654 firm-year observations from 24 countries around the world from 2008 to 2016.FindingsUsing the happiness index from the World Happiness Report developed by the United Nations Sustainable Development Solutions Network, the authors show that a country's overall happiness is negatively correlated with risk-taking behavior by firms. The findings are robust to an alternative measure of risk-taking by firms. Further analyses document that the negative influence of happiness on firm risk-taking is more pronounced for family-owned firms.Practical implicationsThe paper is consistent with the notion that happier people are likely to be more risk-averse in making financial decisions, which, in turn, reduces corporate risk-taking.Originality/valueThis study contributes to the broad literature on the determinants of corporate risk-taking and the growing literature on the role of sentiment on investment decisions. The authors contribute to the current debate about family-owned firms by demonstrating that the presence of family trust strengthens the negative influence of happiness on corporate risk-taking, a topic that has been unexplored in previous studies.

Highlights

Corporate risk-taking is the amount of volatility associated with expected outcomes and cash flows as a result of new investments (Wright et al, 1996)
We explore the crucial role of family trust in reducing firm risk-taking by introducing the interactions between happiness and family ownership
Using five different measurements of happiness level from the World Happiness Report, this paper investigates the association between happiness and firm risk-taking in an international sample of 17,654 firm-year observations in 24 countries

Summary

Introduction

Corporate risk-taking is the amount of volatility associated with expected outcomes and cash flows as a result of new investments (Wright et al, 1996). Note(s): This table provides the summary statistics of happiness variables, firm-level risk-taking and family ownership by country for the sample of 17,654 firm-year observations from 2008–2016. In terms of economic significance, family-owned firms with a one percent point increase in happiness are associated with an approximately 0.002% lower degree of risk, compared to nonfamilyowned firms These results are consistent with Eugster and Isakov (2019), who document that family trust may benefit firms in enhancing corporate governance by minimizing agency problems, thereby lowering risk-taking. This finding supports Hypothesis 2, strongly indicating that the negative effect of happiness on firm risk-taking is more pronounced for family-owned firms

Robustness checks

Findings

Conclusion