Firm Life Cycle, Corporate Risk Taking, and Investor Sentiment

This paper investigates the impact of firm life cycle and moderating role of investor sentiment on corporate risk taking propensities. Using a large sample of US firms during 1987-2013, we find that corporate risk taking varies across the life cycle of the firm. In particular, using Dickinson (2011)'s life cycle measure, we find that risk taking is higher in the introduction and decline stages but lower in the growth and mature stages, resembling a 'U' shaped pattern. We also find that risk taking is higher during periods of high investor sentiment. When life cycle and investor sentiment are interacted with respect to risk taking, results show that during periods of high investor sentiment, firms in the growth stage of their life cycle assume more risk. Finally we document that future operating performance deteriorates as a result of corporate risk-taking which is more pronounced for risk taking during periods of high investor sentiment. Our results are robust to alternative specification of corporate risk taking proxies, life cycle proxy and investor sentiment measures. Collectively, these results suggest that firm life cycle has explanatory power for managerial risk taking behavior