Asymmetric Risk Perception and Firm Financing in the Institutional Envelope

This study investigates how asymmetric risk preferences and national institutions co-determine how firms are financed across countries. We include prospect theory into the discussion of uncertainty avoidance and the institutional envelope in IB, and argue that country-specific bias in the evaluation of downside risks and upside potentials explain variation in how otherwise similar firms raise funds. Exploiting a unique dataset on risk preferences, we show that risk perception in general, and asymmetric risk preferences as predicted by prospect theory in particular, affect corporate capital structure. We also show that the national institutional envelope constrains these effects and discuss implications for international business research beyond capital structure. We test our predictions on a panel of 10,355 firm-year observations.