Risk Taking and Firm Growth

Using firm data from 2002-2012, we examine the relationship between capital structure and risk taking, and between risk taking and firm performance of small and medium-sized enterprises and large private firms. Domestically-owned entrepreneurial private firms are more risk averse than domestically-owned affiliated private firms. Foreign-owned affiliated private firms are much more risk taking than domestically-owned private firms. However, leverage is not strongly associated with less corporate risk taking, but it adversely influences corporate investment significantly. Risk taking has statistically and economically significant effects on corporate growth and corporate earnings. Furthermore, during the credit crisis, risk taking was positively related to corporate earnings, and thus higher risk-taking firms had smaller cash flow shortfalls.