Endogenous Sources of Uncertainty: The Role of Firm Status in Shaping Financially Uncertain Investments

This study examines the relationship between firm status and investment activities. Focusing specifically on financially uncertain investments, we argue that middle-status firms engage in more financially uncertain investments than low- and high-status firms. Moreover, the extent to which firms perform above historical and social benchmarks mitigates the relationship between status and financially uncertain investments. We find broad support for our arguments in a longitudinal sample of privately controlled listed Chinese firms traded on the Shanghai and Shenzhen stock exchanges. Specifically, we find that social benchmarks based on comparisons to firms in the same industry and status group mitigate the inverted U-shaped relationship between status and financially uncertain investments. Moreover, the effect of industry benchmarks, not status benchmarks, is stronger than the effect of historical benchmarks, that is, comparisons to own past performance.