Corporate governance and firm-level jump and volatility risks

Abstract

ABSTRACT Corporate governance plays a significant role in monitoring managerial behaviour, and thus in reducing firm-level risks and increasing firm value. Using a global unbalanced panel of 6,241 firm-year observations over the period of 1996–2016, we investigate the impact of internal and external governance attributes on firm risk. We address the endogeneity problem inherent in governance studies using option-based risk measures for jump and volatility risks. We use a multiple theoretical perspective to explain the relationship between governance mechanisms and firm risk. Our results indicate that board structure and entrenchment factors have a differential impact on firms’ jump and volatility risks. Our evidence reveals that firms with higher entrenchment provisions tend to increase volatility risk and that a higher proportion of outside directors increases firms’ volatility risk. Board size and CEO salary reduce volatility risk yet increase jump risk. We also find that the proportion of outside directors is negatively associated with firms’ jump risk. Overall, our results reveal interesting evidence and provide implications for future governance studies.