Risk Aversion Research Articles

Financing a capital-constrained supply chain: Equity or debt

Many retailers are small and medium enterprises (SMEs) with limited access to capital to finance their operations. Here, we consider a supply chain consisting of a capital-constrained retailer and a manufacturer and examine the effect of equity and debt financing schemes on their operational decisions. Using a game theoretical approach, for the risk-neutral scenario, we take expected profit maximization as the participants’ objective to examine the equilibria of their operational and financing decisions. We also examine the condition under which the manufacturer and retailer adopt equity or debt financing to earn additional profits. We find that when the retailer is highly capital-constrained, she benefits from either financing scheme, but the manufacturer prefers to offer equity financing over debt financing. Otherwise, if the retailer is less constrained, debt financing is preferable. We also extend our analysis to risk-averse participants using the conditional value-at-risk (CVaR) criterion. We show that the decreasing monotone property of the order quantity in the wholesale price, known in the risk-neutral setting, no longer holds. Indeed, the relationship depends on the participants’ risk aversion level; if the manufacturer is highly risk-averse, it chooses to provide equity financing to enhance its CVaR performance; otherwise, it offers debt financing. Our findings provide implications for decision-makers in choosing the optimal financing options and making the associated operations and financing decisions when considering risk attitudes.

Ambiguity aversion, risk aversion, and the weight of evidence

Ambiguity aversion, risk aversion, and the weight of evidence

EE474 Value Assessment Under Uncertainty: Measuring Insurance Value and Risk Aversion for a Novel Neurological Treatment Using a Stated Preference Survey

EE474 Value Assessment Under Uncertainty: Measuring Insurance Value and Risk Aversion for a Novel Neurological Treatment Using a Stated Preference Survey

Agency contracts with incentive mechanisms considering supplier risk aversion in a dynamic platform supply chain

Agency contracts with incentive mechanisms considering supplier risk aversion in a dynamic platform supply chain

Corporate sustainability and biodiversity reporting: A proactive business strategy to mitigate litigation and reputational risks

AbstractBiodiversity is important to human's future survival and global sustainability. One way to achieve corporate sustainability is for firms to report its impacts on biodiversity. However, fear of litigation arising from reporting potentially deters corporations to disclose such information. Motivated by the importance of biodiversity and mixed evidence of shareholder litigation rights as a corporate governance tool, we explore whether the universal demand laws (UDLs) have any effect on corporate biodiversity reporting in the United States. Supporting our short‐termism, risk aversion and agency hypotheses, we find that an exogenous decline in the threat of derivative litigation, reducing a chance for shareholders to file a lawsuit against top management and intensifying agency costs, economically and significantly decreases a corporate's biodiversity reporting by 87%. When the disciplining effect of shareholder litigation drops, the self‐interest manager may want to live a quiet life and disclose less information of biodiversity impact. A proactive business strategy to mitigate litigation and reputational risks is to voluntarily disclose more biodiversity‐related information. Regulators around the world should also promote rigorous reporting requirements to reverse biodiversity loss and save our humanity.

Entrepreneurship in the Age of Social Media

Abstract Social media is ubiquitous and continuously evolving. This study investigates the impact of social media on the intention toward entrepreneurship/self-employment. Further, we explore the moderating effect of social media on the relationships between women, self-efficacy and leisure activities on intention toward entrepreneurship/self-employment using a survey-based dataset. We find that the ability to take advantage of social media within an entrepreneurial context does not necessarily mean that an individual is propelled towards entrepreneurship, however proactive individuals are able to exhibit this characteristic, as are creative women. A counter-intuitive finding is that entrepreneurship and conventional organizational employment choices are not mutually exclusive. While risk aversion inhibits entrepreneurship as expected, contextual conditions such as being married or being employed affects men and women differently.

An analysis of EV charging and route choice behavior considering the effects of planning ability, risk aversion and confidence in battery in long-distance travel

The increasing demand for long-distance and intercity travel is driven by the progress in regional transportation integration and the establishment of charging infrastructure. This increase suggests that the use of electric vehicles (EVs) for long-distance trips is likely to become more prevalent in the future. Therefore, there is an urgent need for more studies on the travel behavior of EV drivers for long-distance trips. However, there are few studies looking at the travel behavior of EV drivers on long-distance trip and multiple charging during trips. To fill this gap, this study identified EV drivers’ preferences for charging and route choice in long-distance or intercity travel on the basis of a stated preference survey, with the Shandong highway network as the travel scenario. A nested logit (NL)-based hybrid choice model was used to investigate the impacts of personal attitudes, namely planning ability, risk aversion and confidence in battery, on the drivers’ charging times choice behavior. The NL structure consists of two levels, with the upper level focusing on the charging times decision process, and the lower level analyzing the choice behavior of routes with no charging, routes with charging once, and routes with charging twice. The results show that the initial state of charge, and attitudes significantly influence the decision on charging times. In addition, EV drivers who are risk-averse and lack confidence in the battery tend to charge, whereas drivers with strong planning ability prefer to charge once in long-distance travel. Charging and resting simultaneously is the best way to meet the needs of charging and resting, and reduce the time lost while driving. These results provide insights on drivers’ travel planning and charging infrastructures planning for long-distance trips.

Optimal Cash Management with Payables Finance

Payables finance, also known as reverse factoring or supply chain finance, is a form of trade finance offered by a bank that provides a supplier with the option to receive a buyer’s payables early while allowing the buyer to extend its payment due date. There has been an increasing adoption of payables finance by various industries in recent years. In “Optimal Cash Management with Payables Finance,” X. Yan, L. Chen, and X. Ding characterize the supplier’s optimal cash policy under the payables finance arrangement with a buyer and a bank. The authors show that it is the supplier’s future cash flow uncertainty, together with the supplier’s risk averseness, that drives the cash liquidity value of payables finance. Numerical results of applying the analysis to data sets obtained from a major U.S. chemical company suggest that adopting payables finance can generate considerable value for the company and its suppliers.

Effects of adult children's marriage on household stock market participation: An event‐study difference‐in‐differences approach using Chinese micro data

AbstractThis paper examines households' stock market participation responses to a critical life‐cycle event, adult children's marriage. An event‐study difference‐in‐differences approach is employed to facilitate identification, which compares changes in the stock market participation behaviors of households that experience children's marriage with households that experience it later as well as households that never experience it. Exploiting household‐wide variations in exposure to children's marriage using the China Family Panel Studies data over the 2010–2020 period, this paper finds that 2 years after children's marriage, households significantly enhance their likelihood of participating in the stock market. Households' willingness to participate increases by 1.1 to 1.6 percentage points depending on specifications. This paper's finding supports time‐varying risk aversion at the household level. Mechanism analysis indicates that children's marriage raises household risk preferences because it mitigates parental old‐age support concerns and alleviates households' consumption commitment to housing and children.

COVID-19 pandemic, oil prices and Saudi stock market: empirical evidence from ARDL modeling and Bayer–Hanck cointegration approach

In 2020, the world experienced several significant events, including the coronavirus (COVID-19) pandemic and the collapse of international crude oil prices. The rapid spread of this pandemic has dramatic impacts on financial markets all over the world, thereby increasing market risk aversion in an unprecedented way since the subprime financial crisis. The decline in stock markets implied volatilities of equity and oil prices, thereby heightening turmoil in global financial markets despite comprehensive and substantial financial reforms. To this end, we investigated the likely effects of this pandemic on the Saudi stock market while controlling for oil prices based on daily data for a period from 1/1/2020 to 19/9/2022. To ascertain the existence of a long-run equilibrium relationship between the variables, we applied autoregressive distributed lag (ARDL) modeling and the error correction model, with this ultimately revealing the existence of strong cointegration in the long run. The ARDL bounds test was found to be robust by combined cointegration tests, thus providing further evidence of a strong relationship in the long run. Granger causality tests also yielded evidence of causality between the variables in both directions. The total COVID-19 confirmed cases and oil prices also caused movements in stock returns in the short run. Our findings have some prominent implications for asset managers and policymakers to improve stock market efficiency and boost global economic activity. Saudi authorities can consequently remove the regulatory and legal obstacles to develop their stock market and better improve the risk management, which will allow to make quick decisions in response to any oil price volatilities. Policymakers should also adopt proactive strategies that can comfort stock investors’ anxieties over the increasing oil price volatilities. Finally, the findings should be treated with some cautions because of the limited sample size and the tests’ statistical inference. Nevertheless, they do open opportunities for further studies to look in more detail at how the COVID-19 pandemic affected, over the short and long run, monetary and fiscal policy coordination, financial stability, and various other macroeconomic indicators in Saudi Arabia.

Firm-Level Investor Sentiment and Risk: Insight from Behavioral Finance

The aim of this study to analyses the investor sentiment, attentions and types of risk which are incurred after specific event like scam etc. This study used monthly dataset of prices from 2006 to 2022 due to availability of data. The event approach is used for data analysis with different data segregation like affected or unaffected datasets of firms. Firm-specific sentiment and attention increased slightly after the scam, indicating market interest and better firm perceptions. Political, noise trader, arbitrage, sovereign, and realised volatility increased during events. The perception of instability and uncertainty suggests scams increase market fears and risk aversion while attracting attention. A detailed comparison between scammed and unaffected firms showed stark differences. Financial scams lowered market confidence and firm stability, causing negative sentiment, lower attention, and higher risks across multiple dimensions. The differential impact suggests that scams' reputational and operational damage can cripple a firm's finances and investor perceptions. The study affects financial economics and market behaviour theory. The study shows how firm-specific sentiment and attention affect risk measures, explaining market dynamics' psychological and behavioural underpinnings. Financial anomalies like scams affect market outcomes due to investor sentiment and attention. Sentiment can force through risk perceptions, so integrated financial analysis models must account for behavioural and psychological factors. Financial scandals affect firm-specific and market-wide variables, according to event studies. With the insights, investors, regulators, and corporate managers can improve market and regulatory practices. This study examines how financial scams affect firm-specific and market-wide variables using theory and practice during and after event.

Firm-Level Investor Sentiment and Risk: Insight from Behavioral Finance

The aim of this study to analyses the investor sentiment, attentions and types of risk which are incurred after specific event like scam etc. This study used monthly dataset of prices from 2006 to 2022 due to availability of data. The event approach is used for data analysis with different data segregation like affected or unaffected datasets of firms. Firm-specific sentiment and attention increased slightly after the scam, indicating market interest and better firm perceptions. Political, noise trader, arbitrage, sovereign, and realised volatility increased during events. The perception of instability and uncertainty suggests scams increase market fears and risk aversion while attracting attention. A detailed comparison between scammed and unaffected firms showed stark differences. Financial scams lowered market confidence and firm stability, causing negative sentiment, lower attention, and higher risks across multiple dimensions. The differential impact suggests that scams' reputational and operational damage can cripple a firm's finances and investor perceptions. The study affects financial economics and market behaviour theory. The study shows how firm-specific sentiment and attention affect risk measures, explaining market dynamics' psychological and behavioural underpinnings. Financial anomalies like scams affect market outcomes due to investor sentiment and attention. Sentiment can force through risk perceptions, so integrated financial analysis models must account for behavioural and psychological factors. Financial scandals affect firm-specific and market-wide variables, according to event studies. With the insights, investors, regulators, and corporate managers can improve market and regulatory practices. This study examines how financial scams affect firm-specific and market-wide variables using theory and practice during and after event.

Financial Behavior and Debt Decision-Making: The Role of Sharia Compliance of Muslim Entrepreneurs in Pekanbaru

Debt decision-making is an alternative funding source solution for MSME entrepreneurs to meet business capital. This research aims to examine financial behavior that influences debt decision-making by moderating Sharia compliance. This research uses primary data through structured questionnaires from 200 Muslim MSMEs. The distribution of questionnaires used convenience sampling techniques. Partial Least Square Structural Equation Modeling (PLS-SEM) was used to analyze data via SmartPLS software. The research results show that, overall financial behavior does not influence debt decision-making. However, each dimension of financial behavior, namely overconfidence, herding, and risk aversion, influences debt decision-making. Apart from that, Sharia compliance and its dimensions in the form of religious knowledge and religious motivation enhance the financial behavior and debt decision-making. Therefore, the research results indicate that Sharia compliance moderates the influence of financial behavior on debt decision-making.

Cognitive Phenotype Shifts in Risk Taking: Interplay of Nonsuicidal Self-Injury Behaviors and Intensified Depression

BackgroundNonsuicidal self-injury (NSSI) behavior is significantly prevalent in both adolescents and psychiatric populations, particularly in individuals with major depressive disorder. NSSI can be considered a result of risky decision making in response to negative emotions, where individuals choose self-harm over other less harmful alternatives, suggesting a potential decision-making deficit in those engaging in NSSI. This study delves into the complex relationship between NSSI and depression severity in decision making and its cognitive underpinnings. MethodsWe assessed decision behaviors in 57 patients with major depressive disorder with NSSI, 42 patients with major depressive disorder without NSSI, and 142 healthy control participants using the Balloon Analog Risk Task, which involves risk taking, learning, and exploration in uncertain scenarios. Using computational modeling, we dissected the nuanced cognitive dimensions influencing decision behaviors. A novel statistical method was developed to elucidate interaction effects between NSSI and depression severity. ResultsContrary to common perceptions, we found that individuals with NSSI behaviors were typically more risk averse. There was also a complex interaction between NSSI and depression severity in shaping risk-taking behaviors. As depressive symptoms intensified, the individuals with NSSI began to perceive less risk and behave more randomly. ConclusionsThis research provides new insights into the cognitive aspects of NSSI and depression, highlighting the importance of considering the influence of comorbid mental disorders when investigating the cognitive underpinnings of such behaviors, especially in the context of prevalent cross-diagnostic phenomena such as NSSI behaviors.

Risk Tolerance, Aversion, and Economics of Energy Utilities in Community Resilience to Wildfires

Risk Tolerance, Aversion, and Economics of Energy Utilities in Community Resilience to Wildfires

Background Risk and Small-Stakes Risk Aversion

Background Risk and Small-Stakes Risk Aversion

Cheap Talk with Transparent and Monotone Motives from a Seller to an Informed Buyer

We develop a model of cheap talk with transparent and monotone motives from a seller to an informed buyer. By transparent and monotone motives, we mean that the seller’s preference does not depend on the state of the world and is increasing in the choice(s) of the buyer regardless of the state of the world. We first show that if the buyer is completely uninformed, only the babbling equilibrium exists. Then, we obtain our main result that even if the buyer has the slightest information, full revelation can be supported by using the crosschecking strategy of the buyer if and only if the seller has a CARA (constant absolute risk aversion) utility function unless the buyer has too much information. In this equilibrium, the buyer can punish the seller who sends a message far above the buyer’s information by ignoring the seller’s message. Paradoxically, no information and too much information of the buyer both eliminate the fully revealing equilibrium with the crosschecking strategy. We also obtain a counterintuitive result that the seller prefers a more informed buyer than a less informed buyer.

Medium-Term Impact of COVID-19 Pandemic on Household Entrepreneurship in China

ABSTRACT This study investigates the medium-term impacts of the COVID-19 pandemic on household entrepreneurship in China, utilizing data from the 2015–2021 China Household Finance Survey. Employing a generalized Difference-in-Differences (DiD) methodology, we find that the pandemic has significantly dampened household entrepreneurship one year after its initial outbreak in China. Our analysis suggests that this decline is largely attributable to heightened risk aversion and increasingly pessimistic outlooks on the future. Moreover, our heterogeneity analysis reveals that this adverse effect predominantly impacts individuals with lower educational levels, the elderly, and those in regions with inadequate digital and financial infrastructure. These findings offer vital insights for policymakers aiming to rejuvenate household entrepreneurship in the aftermath of the pandemic.

Mean-variance portfolio with wealth and volatility dependent risk aversion

Risk aversion rate plays a significant role in mean-variance portfolio selection. Most existing literature assumes it to be constant or wealth dependent, which is unrealistic. In this study, I contend that it is both wealth and volatility dependent because it varies across economic status: either steady or fluctuated. In addition, I decompose the risk aversion rate into a wealth prudence rate and a volatility prudence rate and investigate their mutual effect on portfolio selection under a continuous-time mean-variance framework. Using Game theoretic approach and asymptotic expansion, I derive the optimal trading rule analytically.

Financial awareness, risk aversion and portfolio choice

ABSTRACT “The financial market participation puzzle remains one of the most explored yet unanswered areas in finance. We extend the debate of portfolio choice by examining stock and derivatives market participation by focusing on two key investor traits: financial awareness and risk aversion. We use an investor survey conducted by the Securities and Exchange Board of India (SEBI), covering over 15,000 Indian investor responses. We find that risk aversion is associated with a 20% lower probability of market participation, whereas risk-averse individuals having high financial awareness are around 3.3% more likely to participate in financial markets. Furthermore, financial awareness and risk aversion are more significant in areas with higher economic freedom and lower social capital. Our findings suggest that policymakers may consider tailored financial awareness programmes based on differences in risk aversion among the investors as both these characteristics have a combined relationship with financial market participation.