Are the Chinese Really More Risk Averse? A Cross-Cultural Comparison of the Risk-Return Relationship

Bowman’s risk-return paradox (1980) suggests that the management’s attitude towards risks and returns changes according to the company’s situation. This paper intends to compare different cultural backgrounds in the context of the same political and economic environments, as well as the same market benchmarks, in order to examine whether Western and Chinese management teams demonstrate the same degree of risk aversions. It also aims to investigate the attitudes of Chinese-owned companies toward risk-related decision making. This study samples the financial reports of listed companies in Taiwan and the US from 1987 to 2002. This approach can overcome the shortcomings of Bowman’s (1980) empirical study, as its conclusion cannot validate whether the result is biased due to the sampling period. In order to compare the differences in the attitudes of Western and Chinese management teams toward risks, this approach eliminates variances in systems, business cycles, and markets by sampling the accounting data based on the same Generally Accepted Accounting Principles (GAAP). The empirical findings indicate that Chinese companies are more risk averse than Western companies to ensure earnings. However, Chinese companies are less sensitive than Western companies regarding risk-reward relationships. This is even more pronounced for well-performing Chinese companies based on market benchmarks. This study reflects the similarities and differences between Chinese and US companies in the cross-cultural base where the East meets the West. The findings suggest that Chinese companies may have target levels or reference points other than earnings evaluations.