Firm Risk-taking Research Articles

Executive pay restrictions, political promotion, and firm efficiency: Evidence from China

Using the mandatory reform in executive pay restrictions within Chinese state-owned enterprises (SOEs) as a quasi-natural experiment, we investigate the effects of compensation incentives and political promotion on firm efficiency. Our difference-in-differences analyses reveal that firm efficiency significantly decreases following the reform, and political promotion can attenuate this negative association. Firm risk-taking is a potential mechanism underlying this observed phenomenon. The negative relationship and mitigation effect are more pronounced for central SOEs and commercial class II SOEs. Furthermore, these findings exhibit variations based on distinctive attributes in compensation structures, CEO characteristics, and political promotion ranks. Overall, our study underscores the complementary roles of explicit and implicit incentives within SOEs, providing a strong rationale for government regulation and reform of executive compensation.

Board gender diversity and innovation performance in manufacturing firms: What is the role of risk-taking?

This study investigates the impact of board gender diversity on innovation performance in Chinese listed manufacturing firms, focusing on the mediating role of firm risk-taking. Analyzing 21,262 firm-year observations from 2010 to 2022, we find that board gender diversity positively influences innovation performance through increased risk-taking. Heterogeneity analysis reveals that the impact is stronger in the Eastern and Central regions and in technology-intensive industries. These findings suggest that gender-diverse boards can foster innovation by promoting balanced risk-taking, particularly in regions with better institutional environments and technology-driven sectors. The results have significant implications for corporate governance practices and policies aimed at enhancing gender diversity and innovation.

Does financial flexibility drive firm's risk‐taking in emerging markets? The moderating role of investment efficiency

AbstractUsing a sample of 2301 listed firms from emerging markets for 2014–2023, we examine the effect of financial flexibility (FF) on firm risk‐taking (FRT) and how this relationship is moderated by investment efficiency (INVEFF). GMM and bias‐corrected method of moments models indicate a positive impact of FF on FRT. Notably, INVEFF emerges as a significant moderator, influencing the FF–FRT relationship. High INVEFF strategically amplifies the effect of FF on FRT. Robustness analysis ensures the stability of study findings. This study contributes valuable insights to the nuanced understanding of the FF–FRT relationship in emerging markets.

Corporate governance and firm risk-taking: empirical evidence from India

Purpose This study aims to examine the impact of corporate governance (CG) on firm risk-taking in India. Design/methodology/approach The present study is based on a panel data set of 100 non-financial Indian firms randomly selected from the top 500 firms listed on the Bombay Stock Exchange. The study uses two market-based measures to capture firm risk-taking – total risk and idiosyncratic risk. Generalised method of moments model is applied to examine the relationship between CG and firm risk-taking. Additionally, the fixed-effects model is applied to check the robustness of the results. Findings The study reveals a significant negative impact of CG index, CEO duality, multiple directorships, promoter ownership and institutional ownership on firm risk-taking. Whereas board size, board independence, board gender diversity and the number of board meetings do not significantly impact firm risk-taking. Originality/value This study contributes to the existing literature by providing a comprehensive view of how various CG attributes shape firm risk-taking in India. It examines eight CG variables: board size, board independence, board gender diversity, CEO duality, multiple directorships, number of board meetings, promoter ownership and institutional ownership. Furthermore, the study incorporates idiosyncratic risk as an additional measure of firm risk-taking, largely overlooked in the Indian context. Moreover, to the best of the authors’ knowledge, this is the first study to examine the impact of CG index on firm risk-taking in India.

Family involvement in management and risk-taking of family firms: The moderating role of kinship composition

Corporate risk-taking is a crucial factor that influences firm growth, performance, and survival. Based on the socioemotional wealth and agency theories, we investigate the effect of family involvement in management on risk-taking by considering the moderating role of kinship composition. Using data on Chinese listed family firms, we find that increased family involvement in management significantly reduces family firms’ risk-taking level. The richness of family managers’ kinship weakens the negative effect of family involvement in management on the risk-taking level. Our study enriches the socioemotional wealth and agency theories, by introducing insights of the differential order mode perspective, and demonstrates the significance of kinship ties of family managers on family firms’ risk-taking strategies.

Too scared to make mistakes at home: CEO hometown identity and corporate risk-taking

While prior conceptualizations acknowledge that CEOs’ psychological traits influence firm outcomes, it remains unknown whether and how hometown identity as an important character of CEOs affects corporate risk-taking. Drawn upon place identity theory, our study investigates whether CEO hometown identity mitigates or encourages firms' risk-taking. Using a sample of Chinese listed firms between 2008 and 2020, we show that CEO hometown identity significantly reduces corporate risk-taking, and this finding holds after a battery of robustness checks. Our cross-sectional analyses further reveals that this effect is stronger for female CEOs but weaker for CEOs with international experiences. Additionally, we demonstrate that the reduction in firm risk-taking is achieved through lower financial leverage, enhanced investment efficiency, and reduced earnings management. Collectively, by highlighting the importance of CEO hometown identity, our study furthers the understanding of how CEO psychological traits influence corporate risk-taking.

Board Gender Diversity and its Impact on Firm Risk-Taking

This study aims to analyze the gender diversity of boards of directors and its impact on firm risk-taking. It is interesting to study because the presence of women on the board of directors of a firm has garnered considerable attention in the last few years. The sample is drawn from the industrial sector listed on the Indonesian Stock Exchange from 2017 to 2021. Firm risk-taking is measured by the volatility of stock returns. Using panel data, the results of the research indicate that gender diversity has a significantly positive impact on firm risk-taking. This finding contributes that a female board of directors would lead to greater risk-taking than their male counterparts. This research provides a literature on gender diversity and firm risk-taking in a male-dominated sector in Indonesia, providing insights for investors and companies to consider the potential benefits of gender diversity on board of directors in managing firm risk-taking. Further research could apply other measurements of firm risk-taking and observe other male-dominated sectors for comparison to enhance the study’s limitation.

How does carbon pressure affect corporate risk-taking? Evidence from Chinese energy firms

ABSTRACT Different regions face heterogeneous carbon pressure, but the nexus of carbon pressure and corporate risk behaviour is less explored. Based on annual data from Chinese A-share listed energy firms over the time period 2008–2019, this study shows that carbon pressure can significantly promote the risk-taking of energy firms. Furthermore, government subsidies and tax burdens are essential factors in adjusting the effects of carbon pressure on energy firms’ risk-taking. We find that energy firms with high government subsidies and low tax burdens have a higher risk preference when faced with carbon pressure. In addition, the positive relationship between carbon pressure and risk-taking is stronger and more significant for energy firms from the eastern region and for those that are from non-high- and new-technology industries and non-new energy industries. The above findings provide a theoretical basis and practical reference for governments to adopt effective policies to promote energy firms’ sustainable development and for energy firms to devise smarter investment strategies when facing carbon pressure. Our research offers new insights into how carbon pressure influences energy firm behaviour at the micro-level in the context of climate change.

IS POLITICAL CONNECTION ASSOCIATED WITH CORPORATE RISK-TAKING? MALAYSIAN EVIDENCE

This study explores how political connection is associated with the corporate risk-taking of non-financial firms in Malaysia using the dataset from the years 2002 to 2017. The findings indicate that government ownership negatively influences corporate risk-taking, and this effect is more evident when the percentage of ownership is high. Meanwhile, other types of politically connected firms do not undertake higher corporate risk-taking, even when the connection is expected to generate more resources for these firms. Further analysis showed that firms connected via the family members of the leading politician to be negatively associated with risk-taking, indicating that a closer tie to the government’s top leadership inhibits risky investment choices. Our results contradict past literature where scholars showed that the establishment of connection increases a firm’s incentive to undertake higher corporate risk-taking. This contradiction suggests that the risk behavior of connected firms in emerging countries in Asia differs from those of developed countries and therefore, demands further investigation to improve our understanding of this underdeveloped topic.

Star CEOs: influence on competitor CEOs' risk-taking

PurposeResearch has focused primarily on the antecedents that influence the risk taking of CEOs themselves. This study examines how an important event experienced by a CEO at a direct rival firm influences a CEO's risk-taking. It also examines how prior firm performance relative to aspirations moderates the relationship.Design/methodology/approachIn order to test the hypothesis, the authors perform an a difference-in-differences methodology.FindingsUsing a difference-in-differences methodology, we find that when a CEO wins a prestigious CEO award, competitor CEOs increase their firm risk-taking in the post-award period. The proclivity becomes stronger when their prior firm performance relative to aspirations is better. These findings suggest that a CEO winning a prominent CEO award influences competitor CEOs' risk-taking.Originality/valueThis study contributes to the literature on managerial risk-taking by highlighting that a star CEO winning a prominent award may serve as a striving aspiration and induce competitor CEOs to take risks, and that two different types of aspirations – striving and competitive aspirations – interact to influence the competitor CEOs' risk-taking.

Supplier concentration and firm risk-taking: Transaction cost perspective

This study examines whether and how supplier concentration affects firm risk-taking. While the literature mostly focuses on customer concentration and firm risk-taking, it overlooks the role of suppliers. Based on a sample of Chinese listed firms from 2007 to 2020, we fill this gap by demonstrating that supplier concentration significantly increases firm risk-taking. Our findings remain robust to alternative measurement and endogeneity tests. Regarding the underlying channel, high inventory management efficiency (i.e., low transaction costs) amplifies the positive effect of supplier concentration on firm risk-taking. Additionally, this positive effect is more pronounced in industries more inclined to efficient business operations, specifically those with higher participation in Global Value Chains and with lower market monopoly power. Collectively, our results suggest that the hypothesis from the transaction cost perspective well explains the positive effect of supplier concentration on firm risk-taking.

Product market competition and investment efficiency nexus with mediating effect of firm risk-taking in Pakistan

Product market competition and investment efficiency nexus with mediating effect of firm risk-taking in Pakistan

The impact of a competitor’s Chapter 11 bankruptcy on firm risk-taking

Using a difference-in-differences method, this study examines the effect of a competitor’s Chapter 11 bankruptcy on a firm’s risk-taking. The contingent nature of a competitor’s Chapter 11 bankruptcy, which protects the competitor from creditors’ demands during financial reorganization, may increase uncertainty in the industry. Consequently, the study tests the hypothesis that other firms in the industry respond to a competitor’s bankruptcy by decreasing risky investments in research and development (R&D), capital expenditures and acquisitions. To validate and extend this hypothesis, the study also hypothesizes that a firm’s strong financial standing—low leverage and good performance—and the firm’s diversification reduce the negative effect of the competitor’s bankruptcy on firm risk-taking. Findings from a study of US public firms suggest that, after controlling for industry conditions, firms indeed reduce their risk-taking when a competitor declares bankruptcy and that lower firm leverage, stronger firm performance, and greater firm diversification mitigate this effect. Together, these findings shed light on the literatures on bankruptcy and firm risk-taking. JEL Classification: L22, M10, D81, D25

Enhanced management information disclosure responsibilities and corporate risk-taking: Evidence from the accountability system for errors in China

Enhancing management's responsibility for information disclosure can improve a firm's risk-taking by improving its resource allocation efficiency, but it can also reduce firm risk-taking by increasing managers' risk aversion. After the regulation change from the China Securities Regulatory Commission to require the listed companies to establish an accountability system for material errors in information disclosure of annual reports (hereinafter referred to as the “accountability system for errors”) in late 2009, the risk of misreporting became substantially higher. This paper explores how the accountability system for errors with strengthened management's responsibility for information disclosure affects corporate risk-taking. We find that the accountability system for errors significantly reduces corporate risk-taking, especially idiosyncratic risk, and the impact is greater in firms with short-term CEO tenure and high-tech firms. The improved information environment and increased market pressure are the mechanisms by which the accountability system for errors reduces corporate risk-taking. Further research shows that after the policy change, firms reduce R&D expenditures and output and are more likely to diversify risk through fixed asset investment and diversified mergers and acquisitions. After establishing the accountability system for errors, the higher level of risk-taking will lead to lower CEO compensation and a higher probability of CEO dismissal. This paper enriches the research on corporate governance reform related to strengthening management responsibility. Our research also provides references and guidance for relevant regulatory authorities and listed companies in emerging markets to improve their corporate governance.

Feedback persistence matters! Uncovering the varying effects of success and failure persistence on firm risk-taking

The motivational effects of success and failure on firm risk-taking have been widely documented in research rooted in a behavioral theory of the firm, with the resultant body of work yielding divergent theoretical predictions and empirical findings. Despite scholarly progress, recent studies ruminate that envisioning success and failure through the lens of realized performance and aspiration foregoes its temporal considerations and takes a narrow view of its information content. Emphasizing the temporality of performance feedback, this study proposes success and failure persistence as reliable indicators of firm performance. In particular, we propose a curvilinear relationship between success (failure) persistence and firm risk-taking, such that risk-taking by firms initially decreases (increases) and then increases (decreases) with an increase in success (failure) persistence. Using a data set of publicly listed Indian manufacturing firms from 1995 to 2018, we find robust support for the above-proposed curvilinear relationships. Our findings highlight the nonlinear, asymmetric influences of success and failure persistence on firm risk-taking and disclose the presence of strategic momentum effects. This study contributes to the research on a behavioral theory of the firm and performance feedback theory and offers managerial guideposts for handling success and failure.

The watchers on the wall: Inter-Korean geopolitical risk and firm risk-taking

This article investigates the relationship between Inter-Korean geopolitical risk (IKGPR) and South Korean firms’ risk-taking in the context of highly political tensions in the Korean peninsula. Using a recently developed news-based index of geopolitical risk, our empirical analysis shows an inverse U-shaped relationship between IKGPR and firm risk-taking in South Korea, implying that South Korean firms’ risk-taking increases with IKGPR when IKGPR is low but becomes prudent when IKGPR is high. Such an effect of IKGPR on firm risk-taking is weaker for firms that survive wartime (1900–1969) and is stronger for firms that were established after the Second Korean War (1966–1969), suggesting the role of corporate resilience to geopolitical risk in motivating differences in corporate behaviors. Further analyses indicate that South Korean firms tend to take less risk when the nuclear risk is higher and when they are more technology-oriented.JEL CLASSIFICATION: G30, P00, O31

The preferential treatment of green bonds

We study the preferential treatment of green bonds in the central bank collateral framework as a climate policy instrument within a DSGE model with climate and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral, subject to haircuts determined by the central bank. A haircut reduction induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by a haircut gap of 20 percentage points, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal carbon taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.

Does female leadership matter in firm risk-taking and performance? Evidence from gender equality reforms in an emerging market

ABSTRACT Our article examines the impact of board gender diversity and female leadership on firm risk-taking and firm performance in Vietnam under the implementation of the National Strategy on Gender Equality. We find that female CEOs are associated with lower firm risk-taking and an increase in firm accounting returns is attributed to a transition from male to female CEOs. Further, board gender diversity is independently identified to lower firm risk-taking and female leadership (i.e. female CEOs and chairwomen) generates higher accounting profit (measured by ROA) for their businesses under this reform agenda.

How Chief Executive Officers’ first-hand experience of the Great Chinese Famine affects risk-taking?

To understand the influence of Chief Executive Officers’ (CEOs) early life experiences on their firms’ strategic decision-making, here we explore the impacts of CEOs’ experience of the Great Chinese Famine (1959–1961) on their cognitions and firm risk-taking. Using longitudinal data from publicly listed companies in China from 2006 to 2017, we found that CEOs who experienced the 3-year-long famine are more risk-averse, but that this relationship only exists among CEOs who experienced the famine during their formative years (between 6 and 18 years old). In addition, we found that the negative relationship between CEOs’ early experiences of famine and firms’ risk-taking is weaker when the firm is state-owned and stronger when the firm is facing fiercely competitive markets. We also take a step further to explore the impact of the severity of the famine on individuals, and we find that there is a positive relationship between the severity of the famine and firm risk-taking only within a moderate level. When the severity exceeds a certain level, CEOs are reluctant to take risks with the increase in the severity of the famine. Our findings provide a new theoretical and practical perspective in studying the relationship between CEOs’ early experiences with disaster and firm risk-taking.

Board Diversity, Firm Risk-taking and Firm Performance: Empirical Evidence from India

The study examines the impact of board diversity on the firm risk-taking and firm performance of Indian firms. A subset of Nifty 200 Index companies has been analysed over the period of five years using Panel Regression (fixed-effects) and Dynamic Panel Regression. After controlling for several firms and governance variables, the results showed that board education diversity played significant positive role in influencing firm risk-taking ability whereas board experience diversity found to have no link. With respect to impact of board diversity on firm performance, board educational and board experience diversity had a significant negative influence on stock-based measure of firm performance whereas no relationship in case of accounting-based measure. This research is a novel attempt to study the impact of education and experience attributes of board and recognizes various board-level characteristics on the firm-risk and firm performance, particularly in the wake of the implementation of the Companies Act 2013 in India.