Embedded risk-taking and investor attributions of firm risk: Insights from two empirical studies
In this seminar we present theory and findings from two studies that examine the performance consequences of managerial risk-taking in the global hedge fund industry. In study 1, we study how the social network ties of fund managers influence their tendency to overreact to performance feedback by taking excessive risks. We propose and find that the social support available in closed network structures counteracts excessive risk taking in reaction to poor performance but induces such behavior when performance exceeds aspirations. In study 2, we develop and test a behavioral model of investor responses to managerial risk-taking by drawing on attribution theory to identify the informational cues that regulate investors’ responses to changes in firm risk. We argue and find that while funds with increasing risk levels attract less investor capital, this relationship turns positive when funds operate in high uncertainty environments or have prestigious fund managers. We also demonstrate that managerial prestige becomes a liability under conditions of low environmental uncertainty, a context in which investors punish prestigious managers more—not less—for increasing their fund’s risk.
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Cass Business School, 106 Bunhill Row
106 Bunhill Row, London EC1Y 8TZ, UK
Wouter Stam is a Professor of Entrepreneurship and Academic Director of the Amsterdam Business Research Institute (ABRI) at the School of Business and Economics of Vrije Universiteit Amsterdam. Prior to this, he was a faculty member at the Hong Kong University of Science and Technology and a visiting scholar at the Wharton School and Bocconi University. He now serves on the editorial boards of several top tier journals and is action editor at Entrepreneurship Theory and Practice. Prof. Stam's research interests include strategic entrepreneurship, networks and social capital, and the emergence of new organizational forms and fields. He has published on these and other topics in top tier journals such as Academy of Management Journal, Journal of Business Venturing, Journal of Management Studies, Research Policy, and Long Range Planning.