Firm life cycle, corporate risk‐taking and investor sentiment

TLDR

The study investigates how corporate risk‑taking and its performance consequences vary across the stages of the firm life cycle. It finds that risk‑taking is higher during the introduction and decline stages and lower during growth and maturity, that risk in the former stages negatively affects future performance while risk in the latter stages has a positive impact, that managerial risk propensity rises with investor sentiment, and that firms at different life‑cycle stages respond differently, indicating the life cycle explains corporate risk‑taking behavior.

Abstract

Abstract This study investigates the corporate risk‐taking and the performance consequences at different stages of the firm life cycle. We find that risk‐taking is higher in the introduction and decline stages of the life cycle, but lower in the growth and mature stages. We also find that risk‐taking during introduction and decline stage (growth and maturity stage) affects future performance adversely (positively). We also document that managerial risk‐taking propensities increase during periods of high investor sentiment and firms in different life cycle stages respond to sentiment differently. Collectively, these results suggest that the firm life cycle has explanatory power for corporate risk‐taking behaviour.