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Shareholder governance, bondholder governance, and managerial risk-taking

  • King, Tao-Hsien Dolly
  • Wen, Min-Ming
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    We examine the relation between the overall corporate governance structure and managerial risk-taking behavior. We find that the overall governance structure has a significant impact on how managers make decisions on investment policy: strong bondholder governance motivates more low-risk investments such as capital expenditure and lower high-risk investments such as R&D expenditures, whereas weak shareholder governance (entrenched managers) leads to more R&D expenditures. Moreover, we find that the effects of governance on investment policy differ significantly between speculative and investment-grade firms. For speculative firms, strong bondholder or shareholder governance leads to more capital expenditures and low R&D investments. For investment-grade firms, strong bondholder or shareholder governance leads to low capital expenditures and an insignificant impact on R&D investments. Furthermore, financing and investment covenants exhibit strong binding power to deter risky investments. Finally, a more dependent (or a less independent) board is associated with low capital expenditures and high R&D investments.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-50HP2TF-1/2/ee1bc3cf53d47894d656639d733f2757
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 3 (March)
    Pages: 512-531

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:3:p:512-531
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