Research Paper on Evidence from an Emerging Market on the Relationship between Emotions and Risk Throughout the Corporate Life Cycle

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Title: Evidence from an Emerging Market on the Relationship between Emotions and Risk Throughout the Corporate Life Cycle

Abstract: The literature has extensively examined how market sentiments affect a firm’s propensity for bankruptcy. Less focus has been placed on the corporate life cycle’s potential impact on this nexus, though. The goal of this study is to understand how market sentiment affects corporate bankruptcy risk propensity and whether this sentiment-risk relationship varies throughout the corporate life cycle. To address the endogeneity problem, we use a sample of 301 non-financial listed firms in Pakistan for the years 2005 to 2014 and a two-step generalized method of moments (GMM) regression estimation. According to empirical data, managers often increase a company’s risk of bankruptcy when the market is feeling strongly. Further research reveals that mature firms continue to be risk averse, whereas introduction stage firms prefer to assume the highest bankruptcy risk during the period of positive market sentiments. This study adds to the body of knowledge on corporate finance by arguing that managerial risk-taking is influenced by market sentiments and that corporate managers’ attitudes toward risk vary depending on the stage of a company’s life cycle. In order to prevent excessive risk-taking by firm managers at various stages of the corporate life cycle, capital market regulators should have a strong framework for risk management in place. To reduce the risk exposure of their investment portfolios, creditors and investors must also consider the firm’s respective life cycle stage. Our findings hold up well under different econometric and variable specifications.

Keywords: market sentiments; bankruptcy risk; corporate life cycle; investment portfolio; GMM regression; non-financial firms; Pakistan

Paper Quality: SCOPUS / Web of Science Level Research Paper

Subject: Economics

Writer Experience: 20+ Years

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