Terrorism Risk and the Mediating Role of Manager Experience: Empirical Evidence*

• Published date: 01 September 2021
• Author: Ummad Mazhar
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/asej.12248

Terrorism Risk and the Mediating Role

of Manager Experience: Empirical Evidence*

Ummad Mazhar

Received 5 September 2020; Revised 1 June 2021; Accepted 22 June 2021

Firms in developing countries face security risks and suffer from weak institu-

tional support. In theory, managerial talent is pivotal in firms’assessment of exter-

nal risks and implementing operational changes in response. Using managers’

experience as a proxy for managerial talent, this study estimates its mediating role

in determining firms’security costs in a threatened environment. The study uses

survey data from 1700 formal firms covering 13 sectors and 17 locations in

Pakistan. The nonlinear effects are estimated at different percentiles of the distri-

bution of managerial experience. The main finding is a positive effect of the risk

of terrorism on firm security costs, which is decreasing in managerial experience.

This effect is robust against alternative specifications. The issue of endogeneity of

the variables of interest is tackled using the instrumental variables approach. The

implications and limitations of the findings are noted.

Keywords: manager experience, risk of insecurity, Pakistan, security cost,

terrorism, resource-based theory.

JEL classification codes: D2, L26, O17, K0.

doi: 10.1111/asej.12248

I. Introduction

Business conditions vary widely across countries and play a crucial role in deter-

mining firms’profitability. For instance, it is well documented that firms are not

affected equally by insecurity (Cam, 2008; Berrebi and Klor, 2010). One reason

for this differential response to identical macroeconomic shocks is psychologi-

cal: when threatened, agents’perceptions and assessments of risk are mostly

subjective (e.g. Sunstein, 2003). These findings suggest the importance of strate-

gic management in helping a firm to avoid or exploit risks. This paper empiri-

cally investigates the mediating role of management human capital (MHC) in

the link between terrorism and firm security costs. The study contributes to the

*Mazhar (corresponding author): Suleman Dawood School of Business (SDSB), Lahore Univer-

sity of Management Sciences, Office 324, 3rd Floor, DHA, Sector U, Lahore Cantt, 54792 Lahore,

Pakistan. Email: ummad.mazhar@lums.edu.pk. The author is thankful to the Editor Keiko Ito and

the two anonymous referees for their valuable comments and suggestions. All the remaining errors

belong to the author alone.

© 2021 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Asian Economic Journal 2021, Vol.35 No.3, 317–337 317

understanding of the link between manager experience and firm performance

under security risks.

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Theoretically, there are three distinct reasons for focusing on MHC as a mediating

factor. The principle among them is efficient decision-making due to decentralization

of knowledge, as emphasized by Hayek (1945). Thus, a manager is the perceptible

interpreter of the local conditions that are crucial for efficient plant management in

deviant circumstances. In the context of a non-Western developing country, where

most of the firms are low-productivity local enterprises, the top manager is the

Hayekian ‘man on the spot’. The manager is also pivotal in the implementation of rou-

tines and determining the viability and means of different transactions (Simon, 1991).

The distribution of managerial talent, according to the seminal insight of Lucas

(1978), explains the differences in firm size. According to Lucas (1978), the prob-

lem of resource allocation in a society can be thought of as a problem of the distri-

bution of managerial talent. In addition, according to organization theory,

managers’experience, biases, hierarchy and talents contribute to an organization’s

competitive advantage (Hambrick and Mason, 1984; Barney, 1991). However, the

role of managerial talent in a threatened environment is not fully understood.

In view of these enduring insights, this study examines the role of manager

experience in the face of security risks. It thus assesses the scope of existing the-

ories by exploring the relevance of management in a non-Western setting and

asking a novel question: Does greater manager experience help maintain effi-

ciency in the face of security risks?

To answer this question, the paper gathers a unique dataset using World Bank

Enterprise Surveys (ES). The dataset comprises a pool of 1700 formally regis-

tered firms surveyed at two different points in time. The firms are in 17 different

locations across Pakistan and cover 13 different sectors.

The paper exploits the unique context of Pakistan, a country with a history of

terrorism and political violence. The political developments in the wake of 9/11

terrorist attacks in the United States had put the country at the forefront of the war

against terrorism. This campaign against terrorism resulted in a backlash of terror-

ist attacks sparing none of the major cities in Pakistan (Mazhar, 2019). Despite

these troubles, the country posted decent output growth over the period from 2002

to 2013, with average annual growth of approximately 4.5 percent. This makes it

an interesting case study for investigating the firm-level factors and the role they

have played in sustaining the production processes during this period.

The empirical model controls for the important differences across firms in

terms of size, age, productivity and location in identifying the link between secu-

rity costs and terrorism as a function of manager experience. The most important

finding of the study is that the lack of MHC is associated with significantly high

security costs. In addition, the above-average MHC weakens the link between

firm security costs and terrorism. Using instrumental variables regression, the

empirical model addresses the issues related to reverse causality.

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In this study, manager experience is taken as a measurable proxy for managerial talent/capital.

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