Societal trust, risk avoidance and corporate risk taking: evidence from the global insurance industry
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Societal trust, risk avoidance and corporate risk taking: evidence from the global insurance industry Tao Sun1 Received: 10 April 2020 / Accepted: 21 September 2020 © The Geneva Association 2020
Abstract The global insurance industry is undergoing fundamental change, with countries that are classified as emerging economies (such as China and other countries in the Asia-Pacific region) playing increasingly important roles. In this article, we investigate the effect of two important dimensions of a country’s culture, societal trust and risk avoidance, on risk taking by insurance firms around the world between 2001 and 2014. We measure societal trust and risk avoidance using the World Value Survey. Our results indicate that there is a positive and significant association between the level of societal trust and insurer risk taking in a country, while there is a negative and significant association between the level of risk avoidance and insurer risk taking. We show that our main results are robust to changes in sample composition and potential bias related to the 2007–2009 global financial crisis. One possible concern is that insurer risk taking could be affected by many institutional and societal factors of a country that are not included in our regression analysis. To alleviate this concern, we use the two-stage least squares regression method with instrumental variables to address the potential endogeneity problem related to omitted variables, and find that our results remain unchanged. Additionally, we show that the negative relationship between risk avoidance and insurer risk taking still holds when we use alternative uncertainty avoidance measures. Keywords Insurer risk taking · Societal trust · Risk avoidance · Financial crisis
Introduction Identifying the relevant determinants of corporate risk taking is vitally important for firm performance and survival. Firm managers’ decisions and ability to analyse their firms’ prospects are affected by the social and cultural norms to which they belong. Societal trust and attitudes towards risk and uncertainty differ across countries and * Tao Sun [email protected] 1
Department of Finance and Insurance, Lingnan University, Tuen Mun, Hong Kong, SAR, China Vol.:(0123456789)
T. Sun
national cultures (Hofstede 1980; Rieger et al. 2014; Pan et al. 2017; Kanagaretnam et al. 2019). A growing body of literature examining corporate risk taking in an international context has shown that the heterogeneity of cultural values, such as societal trust and attitude towards risk, can have significant impacts on corporate risk taking. However, little is known about whether cultural values affect insurance firms’ risk taking. In this study, we aim to investigate whether and to what extent sociocultural factors, such as societal trust and risk avoidance, affect insurance firms’ risk taking worldwide. We are motivated by the fact that the global insurance industry is experiencing a significant geographical change. For instance, just two decades ago, the global insurance industry ha
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