Are the risk attitudes of professional investors affected by personal catastrophic experiences?
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Abstract
Abstract We adopt a novel empirical approach to show that the risk attitudes of professional investors are affected by their catastrophic experiences—even for catastrophes without any meaningful economic impact on these investors or their portfolio firms. We study the portfolio risk of U.S.‐based mutual funds that invest outside the United States before and after fund managers personally experience severe natural disasters. Using a difference‐in‐differences approach, we compare managers in disaster versus nondisaster counties matched on prior disaster probability and fund characteristics. We find that monthly fund return volatility decreases by roughly 60 basis points in year +1 and the effect disappears by year +3. Systematic risk drives the results. Additional analyses do not support wealth effects (using disasters with no property damage) or managerial agency, skill, and catering explanations.