Corporate Risk-taking Behavior Research Articles

It takes two to tango: Spousal risk preferences and CEO risk-taking behavior

Using hand-collected data on the cultural origins of S&P 500 CEOs and their spouses, we examine whether differences in risk attitudes within marriages influence corporate risk-taking behavior. We find that CEOs with more risk averse spouses adopt relatively safer corporate policies. The effect is stronger if the CEO comes from a more collectivist culture, has been married more recently, or shares more responsibilities with their spouse. Together, these findings suggest that the cultural composition of CEO household and spousal risk preference affect corporate risk-taking behavior.

The influence mechanism of interlocking director network on corporate risk-taking from the perspective of network embeddedness: Evidence from China.

The interlocking director network can not only help achieve low-cost information sharing and exchange learning among enterprises, but also provide essential resource support for corporate risk-taking behavior. This study aims to empirically analyze the impact, mechanism of action, and boundary of influence of interlocking director network (NET) on corporate risk-taking (RISK) using data of Chinese A-share listed companies from 2007 to 2020.The results show: (1) There is a significant positive correlation between NET and RISK, and the above results are still established after a series of robustness tests. (2) Mechanistic tests show that the NET can promote RISK through two channels: alleviating financing constraints and increasing R&D investment. (3) Further analysis reveals the promotion of NET on RISK is more significant in non-state-owned enterprises and enterprises with higher industry competition intensity. These findings have positive implications for the construction of an inter-enterprise interlocking director network and the enhancement the of the risk-taking level.

ESG performance and corporate risk-taking: Evidence from China

Corporate environmental, social and governance (ESG) is vital for sustainable growth, while the motivation of corporate ESG engagement could decide whether ESG participation is green or greenwashing behavior. This paper attempts to understand the motivation of corporate ESG engagement from the firm's risk-taking perspective. Using Chinese publicly listed firm data from 2010 to 2020, we find that ESG rating significantly reduces corporate risk-taking. This finding still holds after a series of robustness tests to address potential endogeneity concerns and alternative risk-taking proxies. Furthermore, the marginal inhibitory impact of ESG on corporate risk-taking is more pronounced in firms with lower information transparency, weaker corporate governance and less external monitoring pressure. Our results shed essential insight on the trade-off between sustainable growth and corporate risk-taking behavior in a relatively weak investor protection institutional environment.

Investor heterogeneity and negative skewness in stock returns: Evidence from institutional investors

We examine the relation between the probability of future stock price crash and investors’ investment horizons. Using negative skewness as a proxy for firm-specific crash risk, we document a positive association between institutional ownership and stock price crash risk. The relation is, however, driven by short-term institutional investors, while the presence of long-term institutional investors has a negative effect on stock price crash risk. In addition, we find that the presence of short-term institutional investors induces corporate risk-taking behavior. Our results are robust to alternative model specifications, endogeneity concerns, and different measures of crash risk and proxies of investors’ horizons.

The Impact of Global Value Chain Embedding on Corporate Risk Taking of China’s A-Share Market-Listed Companies from 2000–2016

Moving towards the high end of the global value chain (GVC) is an inevitable trend of the development of Chinese enterprises, and the level of enterprises’ risk-taking behavior is directly related to their profit acquisition in the global value chain. Based on the matching data of CSMAR and the “General Administration of Customs of the People’s Republic of China”, this paper explores how the embedding of the global value chain affects the risk-taking behavior of enterprises. It is found that (1) R&D investment is an important factor for listed companies to enhance their risk taking by embedding in the global value chain; however, financial constraints will negatively affect this factor. (2) The study’s findings also indicated that improving innovation capacity and increasing R&D investment is crucial for enterprises in developing countries to raise their corporate value. Moreover, it is helpful for enterprises to escape the jaws of danger in the GVC wave. It is advised that the government develop a financial market or enhance the external environment to encourage enterprises’ development. This study reveals the specific impact of global value chain embedding on corporate risk-taking behavior, provides new empirical evidence for understanding the micro mechanism of the relationship between global value chain embedding and economic growth, and has great practical significance for promoting Chinese enterprises to the high-end of the global value chain.

The moderation role of investment opportunities in modifying the impact of state ownership on corporate risk-taking behavior

This study aims to examine the moderation role of investment opportunities in the effect of state ownership on risk-taking behavior. The research used the financial data of non-financial listed firms in Hanoi and Ho Chi Minh stock exchanges. The sample includes firm observations during the period from 2015 to 2020. These selection criteria yield a sample of 2,664 firm-year observations. The data are collected from Bloomberg. Moreover, the findings are robust by year-fixed effects along with clustered standard errors. The research finds that state ownership negatively affects corporate risk-taking behavior. On the other hand, investment opportunities can moderate the negative impact of state ownership on corporate risk-taking activities. The study proposes two policy recommendations. First, state-owned firms should improve their corporate governance to deal with agency problems. Second, the government should consider policies to encourage state-owned firms to increase their risk-taking behavior.

Credit ratings and corporate risk-taking behavior: evidence from Korea

ABSTRACT We study the period following the 1997 Asian financial crisis to show that the credit rating downgrades affect corporate risk-taking behaviour. We treat the crisis as an exogenous shock that led to improvements in the informativeness of Korea’s credit rating system, and we determine that firms that have experienced credit rating downgrades reduce their risk-taking following the crisis. However, we show that this impact is less pronounced for chaebol-affiliated firms. Furthermore, we present chaebol firms’ characteristics that mitigate the negative impact of credit rating downgrades on their risk-taking behaviour – high net internal capital flow and large ownership concentration. (JEL G24, G32)

The role of cash holdings during Covid-19 pandemic: Evidence from corporate risk-taking behavior of non-financial listed firms in Vietnam

Vietnam has faced the long-lasting COVID-19 outbreak, which has imposed a negative impact on corporate activities, since 2020. This study aims to examine how the COVID-19 outbreak has influenced the risk-taking behavior of companies in Vietnam, investigating this relationship with the moderating role of cash holdings. We used the research data of non-financial listed firms in Vietnam during the period from quarter 1 2018 to quarter 2 2021. According to the Generalized Method of Moments approach, the study concludes that the COVID-19 pandemic period is negatively associated with corporate risk-taking behavior. In addition, there is a significant increase in the level of risk-taking behavior during the COVID-19 pandemic period by enterprises that have more cash holdings.

Linking What I Say and What I Do: Evidence From Perceived Competition Networks.

The enterprise network is of great significance in explaining the risk-taking of individual firm. However, some unobservable networks hidden in different firms have long been neglected. Using the text data of the annual reports of China’s listed firms from 2007 to 2018, this paper adopts a textual analysis method to capture the managers’ perceptions of pressure, and build a special kind of hidden inter-firm networks, that is, the perceived competition networks of managers. In addition, this paper discusses the impact of network characteristics on corporate risk-taking behavior. Empirically, there is a positive association between competition strength and corporate risk-taking, as well as the density of perceived competition network. Furthermore, this paper explores the risk-taking behaviors of peer firms in focal firm’s perceived competition network, and finds that the improvement of peer firms’ risk-taking significantly increases the risk bearing level of focal firm, that is, the positive spillover effect of risk-taking behavior among firms in perceived competition networks. Moreover, managers’ personal traits significantly moderate the impact of network characteristics on corporate risk-taking, which is mainly reflected in younger and male managers. Our findings can enrich the literature on social interactions and corporate behaviors, and help firms to improve their understanding of perceptible peer firms.

Non-family shareholder governance and corporate risk-taking: Evidence from Chinese family-controlled businesses

Increasing corporate risk-taking is crucial for family businesses that tend to be averse to the loss of socioemotional wealth. This study expands research on non-family shareholder governance by exploring the role of non-family shareholders in influencing the strategic decisions of family businesses. We find that the ownership structure and board participation associated with non-family shareholder governance can enhance corporate risk-taking by weakening family control and strengthening inheritance intention. Furthermore, family style and institutional efficiency can optimize the impact of the mechanisms of non-family shareholder governance and corporate risk-taking. Non-family ownership and directors appointed by non-family shareholders exert a cross effect. Compared with non-family ownership, non-family shareholders who are free to participate in corporate governance through ownership and the appointment of directors can better help family businesses improve their corporate risk-taking. Compared with foreign shareholders and institutional investors, the heterogeneous checks and balances of state and private shareholders can effectively enhance corporate risk-taking. Corporate risk-taking can strengthen the long-term orientation of family businesses. This positive relationship is more significant when the level of non-family shareholder governance is higher than when it is lower. Our conclusions broaden the understanding of the corporate risk-taking behavior of family businesses from the perspective of non-family shareholder governance. As such, they shed light on how to enhance the long-term orientation of family businesses.

Corporate risk-taking with long-term, short-term and subordinate credit ratings

PurposeThis study empirically examines, from the first quarter of 1981 until the fourth quarter of 2017, the relations across customary domestic issuer credit ratings (long-term, short-term and subordinate) and three popular corporate risk-taking measurements (the variability of operating profitability, net profitability, and research and development expenses).Design/methodology/approachThe author deploys categorical regressions and robustness tests with control variables, interaction terms, fixed effect variables, lag variables and delta variables.FindingsThe author documents that both short-term and subordinate domestic credit ratings are key determinants of the volatility of operating profitability. The author also identifies long-term credit ratings as secondary factors, yet they do affect broader corporate risk-taking behavioral features (along all three measurements). Furthermore, the author finds that the higher (lower) the credit ratings assigned, i.e. the superior (inferior) the credit quality externally judged, the more (less) overall risk firms tend to undertake.Originality/valueIt is the first research to examine both the inclusive influence and the granular effects of credit ratings on corporate risk-taking (CRT) behavior. It is also the only enquiry to inspect the specific relationships along three types of domestic issuer credit ratings: long-term, short-term and subordinate ratings.

Religiosity and corporate risk-taking: evidence from Italy

This study investigates the impact of local culture, as measured by religiosity, on corporate risk-taking, based on a sample of 155 Italian listed firms, involving 2,382 firm-year observations over the study period 2000–2016. The empirical estimation results suggest a statistically significant negative relationship between corporate risk-taking and religiosity, i.e., greater religiosity reduces corporate risk-taking behavior. Overall, these results are consistent with the empirical literature dealing with other nations on the relationship between corporate decisions and social values (local culture). Finally, the findings are robust to alternative empirical specifications.

Corruption and corporate risk-taking: evidence from emerging markets

PurposeThis paper investigates the relationship between corruption and corporate risk-taking in emerging markets where corruption is considered as “public enemy number one.”Design/methodology/approachThe study measures corruption based on Corruption Control Index annually published by World Bank and examines how corruption affects corporate risk-taking in emerging markets covered in MSCI Emerging Market Index.FindingsWith a sample of 75,338 observations from 8,326 firms across 20 emerging stock markets during the period 2005–2016, the author finds that corruption negatively affects corporate risk-taking. Robustness checks with a reduced sample without China and India, alternatives of corruption measures, various measures of risk-taking and Generalized method of moments (GMM) estimator also show consistent results. Moreover, additional analysis shows that information disclosure mitigates the effect of corruption on risk-taking.Originality/valueThe extant literature implies that corruption may decrease corporate risk-taking behavior through two channels including operational cost and debt financing cost.

Corporate Ownership Structure as a Determinant of “Risk Taking”: Insights from Italian Listed Companies

Ever since major accounting scandals and corporate collapses of the early 2000’s, the improved risk taking and the lax approach to risk management procedures, which are viewed as contributing factors to the market breakdown that occurred in the international market and, in particular, in the U.S. in 2007, have led to an increased awareness of the importance of managing risk on the part of listed companies. Risk management has gained importance in the definition of what it means to be the best and most efficient corporate governance structure and mechanism, as it can play a fundamental role in helping to achieve the company’s target. Also disclosure related to risk management is fundamental for the efficient functioning of capital markets since it helps to improve corporate transparency and to reduce the information asymmetry between insiders and outsiders.
 
 This paper aims to investigate the relationship between ownership structure and corporate risk-taking behavior and disclosure, as a tool for protecting shareholders, among Italian listed companies. The analysis is devoted to the Italian stock market because it is strongly characterized by a high ownership concentration and by the presence of a family ownership model; and this scenario makes the Italian one an interesting case to study. Based on a sample of 233 Italian listed companies, through a multivariate regression, we find that a high level of ownership concentration is positively related to a firms' low level of risk taking by the board of directors, so giving interesting insights to regulators and practitioners, as well as for further research.

시장경쟁에 대한 가족기업 위험추구 행태의 차별성

[연구목적] 본 연구는 제품시장경쟁이 기업의 위험추구 성향 및 기업의 성과에 미치는 영향에 있어 가족기업과 비가족기업의 차별성을 검증한다. 본 연구에서는 가족기업의 차별화된 대리인 문제와 지배구조가 제품시장경쟁에 대한 경영자의 위험 회피 성향에 차별성을 야기하며, 따라서, 제품시장경쟁 위험이 장기성과에 미치는 영향도 다르게 나타날 것이라고 기대하고 이를 검증한다.BR[연구방법] 2015년말 국내 유가증권시장 상장 기업을 대상으로 2005－2013년을 연구기간으로 하여 가족기업과 비가족기업을 분류하고, 산업 집중도로 측정한 제품시장경쟁이 기업의 위험추구 성향 및 장기성과에 미치는 영향이 가족기업과 비가족기업에서 다르게 나타나는지 다중회귀분석을 실시하여 검증하였다.BR[연구결과] 가족기업에서는 제품시장경쟁이 기업의 위험 회피 성향에 미치는 부정적인 영향력이 약화되고, 제품시장경쟁이 기업의 장기성과에 미치는 부정적인 영향력도 가족기업에서 더 약하게 나타났다.BR[연구의 시사점] 본 연구는 가족기업의 지배구조가 제품시장경쟁이 기업의 위험 회피 성향과 장기성과에 미치는 영향을 약화시킨다는 사실을 검증하여 위험에 대응하는 가족기업 지배구조의 차별적인 특성과 그 역할을 발견하였다는 점에 그 의의가 있다.

State Ownership and Risk-Taking Behavior: An Empirical Approach to Get Better Profitability, Investment, and Trading Strategies for Listed Corporates in Vietnam

Corporate risk-taking behavior and investment is a crucial factor in order to seek higher profits and a better trading strategy. Competitive advantage and innovation, while maintaining profitability and state ownership, are considered as crucial resources. Furthermore, it is essential to connect the short-term and long-term business and investment objectives plus stakeholder’s expectations to corporate sustainability and development. This connection is especially important in the context of transforming economies and getting better trading strategies. This study estimates the relationship between state ownership, profitability, corporate risk-taking behavior, and investment in Vietnam by using Generalized Method of Moments (GMM) methods. Using the data of 501 listed non-financial corporates during the period 2007–2015 from Ho Chi Minh City and Hanoi Stock Exchanges, we find that profitability is determined as a factor to reduce corporate risk-taking acceptance caused by the chances of entrenchment. Meanwhile, the impact of state ownership on the risk appetite of corporate has a non-linear effect. In particular, state ownership reduces corporate risk-taking behavior and investment but yet increases the risk-taking behavior and investment when the state ownership rate exceeds a threshold. One the one hand, this implies that the low level of state ownership not only prevents risk-taking behavior and investment but also results in more severe agency problems, causing unsustainability due to the imbalance of interests among various stakeholders. On the other hand, a dominant role of state ownership concentration causes a boost in corporate risk-taking decision-making in investment and trading strategy, leveraging the connection of significant external resources to deal with uncertain problems. The study contributes to existing theories of corporate governance in the context of a socialist-oriented market.

Co-opted Boards, Social Capital, and Risk-taking

This study investigates the effect of co-opted boards on corporate risk-taking behavior, as well as the moderating effect of social capital on the relation. We find a positive relation between board co-option and equity volatility. Endogeneity concerns are circumvented using the difference-in-difference methodology. We further find that high social capital surrounding firm headquarters alleviates managers’ risk-taking incentives when corporate governance is weak, and that our results are robust to alternative measures of social capital.

Economic policy uncertainty and corporate risk-taking: International evidence

Corporate risk-taking behavior has important implications for firm growth, performance and survival. The extant literature shows that corporate risk-taking is determined by many environmental factors. Recently, economic policy uncertainty has received increasing academic attention, but there has been no research on the relationship between economic policy uncertainty and risk-taking across countries. Using a sample of 151,483 observations across 18 countries over the period from 2005 to 2016, we find that economic policy uncertainty is negatively related to corporate risk-taking. Moreover, we provide additional analysis to examine whether national culture affects the strength of this effect. Our research findings show that uncertainty avoidance culture and individualistic culture make the negative effect of economic policy uncertainty on corporate risk-taking behavior stronger and weaker, respectively.

Optimal risk-taking in corporate defined benefit plans under risk-shifting

PurposeThe purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented by the position of a vulnerable option is solved.Design/methodology/approachThe simple traditional contingent claim approach is applied, which considers only the distributions of corporate cash flow, without the model expansions, such as market imperfections, needed to explain the firms’ behavior for DB plans in previous studies.FindingsThe authors find that the optimal solution to the equity holders’ DB investment problem is not an extreme corner solution such as 100 percent investment in equity funds as in the literature. Rather, the solution lies in the middle range, as is commonly observed in real-world economies.Originality/valueThe major value of this study is that it develops a clear mechanism for obtaining an internal solution for the equity holders’ DB investment problem and it provides the understanding that the base for corporate investment behavior for DB plans should incorporate the fact that in some cases the optimal solution is in the middle range. Therefore, the corporate risk-taking behavior of DB plans is harder to identify than the results of the empirical literature have predicted.

Corporate risk-taking after adoption of compensation clawback provisions

The adoption of clawbacks purports to mitigate harmful behavior to firms’ operation, including excessive corporate risk-taking at the expense of investors’ interests and firms’ long-term benefits. This study empirically examines whether corporate risk-taking declines after the adoption of clawback provisions in the compensation contracts of top executives in publicly traded US firms. Using a sample of clawback adopters and non-adopters in the Russell 3000 Index firms during the period 2005–2014, we find that the presence of clawback provisions is significantly associated with a lower level of corporate risk-taking as reflected by firms’ investment strategies and their capital structure. Additional analyses suggest that this association is stronger for small firms and for firms audited by Big 4 auditors. Robustness checks of using alternative measures for corporate risk-taking, controlling for the occurrence of financial restatements, board independence, and internal control quality, and employing a propensity matching score matching sample further support the main results. Overall, the results of this study indicate more conservative corporate risk-taking behavior after the adoption of clawbacks.