Peer Firms' Earnings Disclosure and Corporate Risk-taking

Besides firms’ own ones, peer firms' financial disclosures may also affect corporate decision-making. While most existing studies examine how peers’ disclosures influence firms’ investment levels, firms’ risk-taking, which closely correlates to economic stability, remains under-explored. I hypothesize that firms learn important information from their peers’ disclosures, based on which they adjust their risk-taking behaviors. I provide large sample evidence (127,896 firm-year observations) corroborating a negative correlation between peer firms' earnings performance and the focal firm's level of risk-taking. This suggests that when peers disclose outstanding earnings, firms’ fear of competition outweighs their positive expectations of the industry outlook, thus firms tend to be more risk-averse. I also find that compared with over-performing firms, under-performing ones are more risk-loving, which accords with the prospect theory. Finally, I show that under-performing firms are less responsive to peers' earnings in terms of risk propensity because they are always more risk-seeking regardless of the degree of competition.