Creative culture, risk‐taking, and corporate financial decisions

• Author: Erdem Ucar
• DOI: http://doi.org/10.1111/eufm.12198
• Published date: 01 June 2019
• Date: 01 June 2019

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684 © 2018 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/eufm Eur Financ Manag. 2019;25:684–717.

DOI: 10.1111/eufm.12198

ORIGINAL ARTICLE

Creative culture, risk-taking, and corporate

financial decisions

Erdem Ucar

Department of Finance, Mihaylo College

of Business and Economics, California

State University Fullerton, Fullerton,

California

Email: erucar@fullerton.edu

Abstract

I examine how creative culture affects corporate financial

decisions. Firms have corporate risk-taking behavior and

policies consistent with variations in local risk-taking

propensity induced by creative culture. Firms located in

areas with a strong creative culture have higher levels of risk

exposure, investment, and growth. These firms also

accumulate more cash consistent with the precautionary

motive. My findings remain robust after controlling for

endogeneity and a series of robustness checks. The

empirical findings are consistent with the risk-taking

tendency associated with creativity and creative culture.

This paper introduces the role of creative culture and risk-

taking in corporate financial decisions.

KEYWORDS

cash holdings, corporate risk-taking, creative culture, local factors

JEL CLASSIFICATION

G30, G31, G32

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INTRODUCTION

The greatest artists like Dylan, Picasso, and Newton risked failure. If we want to be great,

we’ve got to risk it too. (Steve Jobs)

I would like to thank Christos Pantzalis, Laura Starks, Babak Lotfalie, Mehmet Akbulut, Arsenio Staer, Sinan Goktan, and

the seminar participants at the Financial Management Association (FMA) European Conference 2017 and the California

Corporate Finance Conference 2017 for their helpful comments. I also would like to thank the editor, John Doukas, and the

anonymous referee. All remaining errors are mine.

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Recent studies (e.g., Almazan, De Motta, Titman, & Uysal, 2010; Dougal, Parsons, & Titman,

2015) examine the impact of geography on corporate policies and underline the need for further

research on which geographical factors have a key influence on financial decisions. Although culture

emerges as an important part of the decision-making process and collective mind setting in other areas,

the financial literature ‘has paid relatively little attention to the role of culture in financial decision-

making compared to other business disciplines and economics’(Karolyi, 2016, p. 610). Culture can

help unearth the missing details behind financial decision-making. Graham, Harvey, Popadak, and

Rajgopal (2016a, 2016b) report that managers see corporate culture as one of the most important

factors for corporate success and value creation. They indicate that future research in corporate culture

can help us better understand corporate success and financial decisions. Local culture is seen as one of

the key determinants influencing corporate culture and decision-making. Hence, local cultural factors

can help us understand the role of geography in financial decision-making and the influence of culture

on corporate policies and unearth the missing pieces of the corporate risk-taking and financial

decisions. This paper introduces creative culture as a new risk-taking measure and investigates the

effect of local creative culture and risk-taking on corporate financial decisions.

In this paper, I demonstrate the effect of local creative risk-taking on geographically varying

corporate risk-taking behavior and corporate policies. Firms located in areas with a strong creative

culture have higher levels of risk exposure, investment, and growth. These firms also hold more

cash consistent with the precautionary motive. Studies from other disciplines have investigated and

highlighted the relationship between creativity and risk-taking (e.g., Dewett, 2004, 2006, 2007;

Fidler & Johnson, 1984; Jalan & Kl einer, 1995; Shalley, 1995; Tesluk, Farr, & Klein, 1997; Zho u &

George, 2001). By its nature, creativity includes a higher risk-taking propensity. It requires

searching for the unknown and deviating from norms (Adams, 1986). Creativity is also closely

related with high risk-takingpropensity in the social domain (Tyagi, Hanoch, Hall, Runco,&

Denham, 2017). Risk-taking norms are crucial factors that support creative performance (e.g.,

Isaksen, Lauer, & Ekvall, 1999; Shin & Eom, 2014; West & Sacramento, 2012). A willingness to

take risks is a crucial point ofcreative behavior (Dewett,2004, 2006, 2007); creativeenvironments

emerge in organizations when employees have a willingness to take risks (Tesluk et al., 1997).

Previous studies also highlight the risk-taking behavior of creative people (i.e., Amabile, 1983;

Gardner, 1994) by suggesting that creative people are risk-takers (i.e., Heilman, 2016). Consistent

with these studies, my paper uses the connection between risk-taking and creative culture and

examines the impact of this link on corporate financial decisions.

Studies from different areas also highlight the link between creativity and risk-taking. For example,

prior studies in the ethical area have also shown the relationship between risk-taking and creativity

(Gino & Ariely, 2012; Mai, Ellis, & Welsh, 2015). Marade, Gibbons, and Brinthaupt (2007) underline

risk-taking as a key element of creative behavior in producing novel ideas in arts. The articles on media

also recognize creative people as risk-takers. I accordingly conjecture that the risk-taking behavior

associated with creative culture can affect both corporate risk-taking behavior and related corporate

policies. My findings support this conjecture, demonstrating a consistently higher degree of corporate

risk-taking tendencies and corporate outcomes consistent with creative risk-taking.

My findings show that firms located in counties with stronger creative culture −as proxied by the

local creative class −have higher levels of volatility of stock returns and return on assets (ROA), as

well as higher levels of investment and growth. For example, a one-standard-deviation increase in

CreativeShare −the creative culture variable in the tests −leads to an increase in ROA volatility,

which is almost 13.8% of the average ROA volatility level in the sample. Similarly, one-standard-

deviation increase in CreativeShare is associated with an increase in investment (growth) which is

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approximately 7% (6.5%) of the average investment (growth) level in the sample. These findings are

consistent with the risk-taking tendency induced by innovativeness and creative culture.

I also examine the creative culture effect on corporate cash policies. My paper presents a positive

relationship between local creative culture and cash holdings and shows that firms located in areas with

stronger creative culture accumulate more cash than other firms. A one-standard-deviation increase in local

creative culture level leads to an increase in cash holdings, which is about 10.12% of the average cash

holdings in the sample. Prior literature underlines the relationship between risk and cash holdings (e.g.,

Acharya, Davydenko, & Strebulaev, 2012; Liu & Mauer, 2011; Opler, Pinkowitz, Stulz, & Williamson,

1999). Opler et al. (1999) suggest that firms with growth opportunities and riskier cash flows hold higher

cash balances. Bates, Kahle, and Stulz (2009) highlight the importance of the precautionary motive in

determining corporate cash holdings. Acharya et al. (2012) examine the relationship between cash holdings

and credit risk and find that riskier firms accumulate more cash in line with the precautionary motive.

Harford, Klasa, and Maxwell (2014) show that cash holdings can mitigate the negative effects of

refinancing risk. Liu and Mauer (2011) find a positive relationship between CEO risk-taking incentives and

cash holdings. Consistent with prior studies, my findings suggest a positive relationship between risk-

taking induced by creative culture and corporate cash holdings. My paper also underlines the role of

geography for cash policy by introducing creative culture as a local component of cash policy.

My empirical findings still hold after addressing the endogeneity concern and a series of robustness

tests. I use a propensity score matching analysis and an instrumental variable (IV) analysis, showing that my

empirical findings hold after addressing endogeneity. Moreover, the findings are robust to local controls as

well as to an alternative firm location data set. The results are more pronounced for local firms compared to

geographically dispersed firms that have operations in multiple locations. This point highlights the local

component of corporate risk-taking behavior and decision-making, suggesting that the creative risk-taking

effect emerges through interactions between local and corporate cultures. The empirical findings also hold

after excluding areas with strong, well-known creative culture. This result underlines the strength of the

local risk-taking effect and indicates that creative risk-taking affects not only the firms located in areas with

well-known creative culture but also the firms located in other areas without well-known creative culture.

Moreover, the empirical results remain robust after controlling for industry clusters shown in Almazan et al.

(2010). This point demonstrates that the empirical findings are driven by local industry clusters.

This paper introduces a new proxy of local risk-taking tendency, creative culture, to shed additional

light on the determinants of corporate policies and risk-taking. To measure local creative culture, I use

the fraction of the local creative class which is ‘comprised of people in occupations that produce new

knowledge and ideas and understand their use’(McGranahan, Wojan, & Lambert, 2011). Richard

Florida introduces the creative class theory (Florida, 2002a, 2002b) while he (Florida, 2005) describes

the creative class as people who work in knowledge-intensive industries, intellectuals, artists, etc. The

creative class plays an important role in supporting urban development through both creative output

and innovative growth (Florida, 2002a, 2002b, 2005; McGranahan & Wojan, 2007). I use the

Economic Research Service (ERS) data set which refines and revises Florida's creative class measure

to determine the occupations that involve creative thinking skills, generating new applications, systems

or ideas in a better and updated way.

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After considering the close connection between creative thinking,

innovativeness, and risk, one sees that the fraction of the local creative class is a proxy for local creative

culture and measures risk-taking induced by creative culture.

This study contributesto the literature in the followingways. To my knowledge, this is the firstpaper

in the finance literaturethat highlights the link between the creative classand corporate risk-taking. My

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https://www.ers.usda.gov/data-products/creative-class-county-codes/documentation/

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