Corporate Risk Culture∗

We examine the formation and evolution of corporate risk culture, defined as the preferences towards risk and uncertainty shared by a firm’s leaders, as well as its effect on corporate policies. Commonality in risk attitudes inside the firm arises through the selection of managers and directors with similar attitudes towards risk and uncertainty. Selection also leads to persistence in corporate risk culture over time and across generations of leadership, preserving the risk preferences of the founders long after their departure from the firm. Cross-sectional differences in founders’ risk attitudes contribute to persistent differences across firms in corporate policies such as R&D intensity and cash holdings. Finally, divergence in risk preferences among corporate leaders reduces corporate acquisitiveness and increases the use of formal incentives, for example, through the convexity of CEO compensation.