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Corporate Governance and Risk-Taking

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  • KOSE JOHN
  • LUBOMIR LITOV
  • BERNARD YEUNG
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    Abstract

    Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection. Copyright (c) 2008 The American Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2008.01372.x
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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 63 (2008)
    Issue (Month): 4 (08)
    Pages: 1679-1728

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    Handle: RePEc:bla:jfinan:v:63:y:2008:i:4:p:1679-1728

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    Cited by:
    1. Toshihiro Okada & Kohei Daido, 2009. "The Effects of Corporate Finance on Firm Risk-taking and Performance: Theory and Evidence," Discussion Paper Series 45, School of Economics, Kwansei Gakuin University, revised May 2009.
    2. Teodora Paligorova, 2010. "Corporate Risk Taking and Ownership Structure," Working Papers 10-3, Bank of Canada.
    3. Boubaker, Sabri & Nguyen, Pascal & Rouatbi, Wael, 2012. "Large shareholders and firm risk-taking behavior," MPRA Paper 39005, University Library of Munich, Germany.
    4. Christopher F. Baum & Atreya Chakraborty & Boyan Liu, 2008. "The Impact of Macroeconomic Uncertainty on Firms' Changes in Financial Leverage," Boston College Working Papers in Economics 688, Boston College Department of Economics.
    5. Gropp, Reint & Köhler, Matthias, 2010. "Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis," ZEW Discussion Papers 10-013, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Kimie Harada & Pascal Nguyen, 2011. "Ownership concentration and dividend policy in Japan," Managerial Finance, Emerald Group Publishing, vol. 37(4), pages 362-379, April.
    7. Jian, Ming & Lee, Kin Wai, 2011. "Does CEO reputation matter for capital investments?," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 929-946, September.
    8. Sridhar Arcot & Valentina Bruno, 2012. "Do Standard Corporate Governance Practices Matter in Family Firms?," FMG Discussion Papers dp710, Financial Markets Group.
    9. Ron Alquist & Ben Chabot, 2012. "Institutions, the cost of capital, and long-run economic growth: evidence from the 19th century capital market," Working Paper Series WP-2012-17, Federal Reserve Bank of Chicago.
    10. Nguyen, Pascal, 2012. "The impact of foreign investors on the risk-taking of Japanese firms," MPRA Paper 38991, University Library of Munich, Germany.
    11. Yusuke Takasu & Makoto Nakano, 2012. "What Do Smoothed Earnings Tell Us about the Future?," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 1-32, December.
    12. King, Tao-Hsien Dolly & Wen, Min-Ming, 2011. "Shareholder governance, bondholder governance, and managerial risk-taking," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 512-531, March.
    13. Nakano, Makoto & Nguyen, Pascal, 2012. "Board size and corporate risk-taking: Further evidence from Japan," MPRA Paper 38990, University Library of Munich, Germany.
    14. Boubakri, Narjess & Cosset, Jean-Claude & Guedhami, Omrane & Saffar, Walid, 2011. "The political economy of residual state ownership in privatized firms: Evidence from emerging markets," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 244-258, April.
    15. Cole, Rebel & Turk, Rima, 2007. "Legal origin, creditor protection and bank lending around the world," MPRA Paper 29180, University Library of Munich, Germany, revised 31 Dec 2010.
    16. Bradley, Michael & Chen, Dong, 2011. "Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 83-107, February.
    17. Houston, Joel F. & Lin, Chen & Lin, Ping & Ma, Yue, 2010. "Creditor rights, information sharing, and bank risk taking," Journal of Financial Economics, Elsevier, vol. 96(3), pages 485-512, June.
    18. Nguyen, Pascal, 2011. "Corporate governance and risk-taking: Evidence from Japanese firms," Pacific-Basin Finance Journal, Elsevier, vol. 19(3), pages 278-297, June.

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