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Does good board governance reduce idiosyncratic risk in emerging markets? Evidence from China

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  • Fareed, Zeeshan
  • Wang, Nianyong
  • Shahzad, Farrukh
  • Meran Shah, Syed Ghulam
  • Iqbal, Najaf
  • Zulfiqar, Bushra

Abstract

This study examines the impact of board governance on idiosyncratic risk in the context of Chinese listed firms. Contrary to previous evidence from developed markets, we show that good board governance significantly reduces idiosyncratic risk in China. We also show that non-state-owned and foreign firms are relatively more capable of minimizing idiosyncratic risk than are state-owned and private firms. The empirical results obtained from CAPM are not sensitive to alternative proxies of idiosyncratic risk. We also find a significantly stronger impact of board governance on idiosyncratic risk after controlling for endogeneity and performing a sensitivity analysis. Our findings provide valuable insights into firm risk-taking behaviour in emerging markets.

Suggested Citation

  • Fareed, Zeeshan & Wang, Nianyong & Shahzad, Farrukh & Meran Shah, Syed Ghulam & Iqbal, Najaf & Zulfiqar, Bushra, 2022. "Does good board governance reduce idiosyncratic risk in emerging markets? Evidence from China," Journal of Multinational Financial Management, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:mulfin:v:65:y:2022:i:c:s1042444x22000202
    DOI: 10.1016/j.mulfin.2022.100749
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    More about this item

    Keywords

    Board attributes; Board governance index (BGI); Idiosyncratic risk; Total risk;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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