Faculty of Management Research Workshop; Wouter Stam, VU University Amsterdam

Embedded risk-taking and investor attributions of firm risk: Insights from two empirical studies

Wouter Stam

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.

Please contact faculty administration should you wish to attend.