Business environments and managers' risk appetite in emerging markets

Purpose This study explores managers' risk-taking decisions and evaluates the impact of the business environment and policy changes on managers' risk preferences. The Chinese market is chosen as the study target because the large number of state-owned enterprises (SOEs) provide a good opportunity to discover the heterogeneities of managers' risk preferences based on different firm characteristics. This study contributes to the body of research connecting the business environment with managers' risk-taking behavior and helps us understand findings in existing research that performance-based manager contracts may adversely affect shareholders. The evidence presented may inform future policymaking. Design/methodology/approach The research collects financial report information from the exchange-listed firms in the Chinese market and uses the short-selling policy change in 2019 to test the impact on managers' risk preferences. Empirical regression methods are used to analyze the data. The difference-in-difference method is used to evaluate the policy impact, and to alleviate the endogeneity problem, we have changed the measures of the variables and used subsamples to explore the firm characteristic-based heterogeneous mechanisms. Findings The empirical analysis reveals that corporate governance issues that develop from the common Chinese practices of share pledging, state-ownership, and a 2019 policy change allowing certain identified firm shares to be used in short-selling and margin-trading, all increase managers' risk-taking. Additionally, the lack of external monitoring inherent at SOEs exacerbates the risk-seeking effects of share pledging and the policy change allowing short-selling and margin-trading. Originality/value This study focuses on managers' risk preferences based on the environment and policy changes. Our study uses the earnings quality as the indicator to evaluate the risk preference changes. The correlation established between managers' risk-seeking behavior and different business environments contributes to the theoretical understanding of performance-based contracts, designed to mitigate agency problems by aligning managerial and shareholder interests, even though they may inadvertently heighten managers' risk-seeking tendencies and impact shareholders' interests at critical junctures.