Do Managers Overreact to Nature Disaster Evidence from Earthquake Events

Abstract: This paper investigates the availability heuristic which inflates manager's perception of liquidity risk attributing to earthquake strikes. Employing the financial reporting data of Chinese listed firms, I estimate a fixed-effect model of severe earthquake events and corporate cash holding as the proxy for a firm's self-insurance coverage. Since the probability of a future earthquake is exogenous to previous shocks, the optimal insurance decision is supposed to be irrelevant to strikes. Adversely, I find that firms incline to hold excess cash as liquidity buffer against seismic risk when a salient quake strikes area nearby. Driven by the availability heuristic, this pattern is transitory but persistent and perennial. Ultimately, the unduly extra cash holding casts considerable economic consequence as it retains the value of cash as well as the cash dividend to the shareholders.