Exploring the relationship between human-centric AI and firm idiosyncratic risks
For firms and investors, this paper provides empirical evidence on how ethical AI strategies can reduce firm-specific financial risks, though the findings are limited to the Chinese context.
The study investigates how human-centric AI (HCAI) affects firm idiosyncratic risks (IR) using Chinese listed firms from 2015-2023, finding that HCAI is associated with lower IR, with digitalisation and executive shareholding strengthening this effect while operational efficiency and CEOs with IT background weaken it.
Despite the extensive discussions of human-centric AI (HCAI) in Industry 5.0, its effects on firms' idiosyncratic risks (IR) remains underexplored. This is an imperative issue for firms navigate financial risks during the current technological revolution, as IR reflects investor reactions to corporate heterogeneous AI strategies and implementations by isolating firm-level stock volatility from systematic factors. Integrating situated AI theory with social-technical systems theory, we conceptualise HCAI as a situated AI strategy that reduces AI-related ethical risks and fosters AI-Human synergies in firms' business operations, ultimately reducing IR by aligning with stakeholders' diverse expectations. Moreover, socio-technical factors, namely digitalisation, operational efficiency, executive shareholding, and CEOs with IT background, may moderate the HCAI-IR relationship. Using a multi-source panel dataset of Chinese listed firms from 2015 to 2023, we find that HCAI is associated with lower firm IR. Furthermore, digitalisation and executive shareholding strengthen this risk-reducing effect, whereas operational efficiency and CEOs with IT background surprisingly attenuate it. Our findings offer theoretical contributions and practical insights for both ethical AI governance and firm financial risk management in the AI era.