Munich Risk and Insurance Center

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Project 2: Managerial Discretion and Variable Risk Preferences

Contact: Benjamin Heidler, Johannes Jaspersen, Dominik Lohmaier, David Pooser, Andreas Richter

We empirically test firm risk-taking preferences under the behavioral theory of the firm using the U.S. property and casualty insurance market. We base our predictions on the March and Shapira (1992) model and amend it through the inclusion of a moderating factor: variable managerial discretion. Variable managerial discretion is observed in our sample by studying differences between stock and mutual insurers. We are the first study to jointly test for the firm's focus (i.e., risk-taking motive) on a survival versus an aspirational reference point as predicted by March and Shapira (1992). Our results generally show that firms focus risk-taking decisions on an aspirational reference point and that managerial discretion has a strong moderating effect on firm risk taking when performance exceeds social aspirations.