Idiosyncratic Risk and the Choice of Corporate Investment Behavior – Based on the Perspective of Nonlinear Relationships between Variables

Abstract

This paper investigates how managerial ability affects managerial choices regarding idiosyncratic risk taking. We apply multivariate analyses on China's listed firms incorporated from 2009 to 2018. We find a significantly positive association between managerial ability and risk after controlling for standard firm-level factors as well as firm-year fixed effects. Moreover, we seek to understand the economic mechanisms through which managerial ability can affect risk. We find that the positive relation between managers and risk is more pronounced in the presence of greater earnings pressure and information gaps, whereas such a positive relation is less in highly innovative firms. In addition, we provide new evidence on the relationship between managers' innate ability and uncertainty due to the agency problem. Our findings provide new insights into the role of managerial ability in the formation of corporate policies