Firm Risk-taking Research Articles

Once Bitten, Twice Shy: How CEO Famine Experience affects Firm Risk-taking

To comprehend the influence of CEOs’ early life experience on corporate strategic decision-making, this study examines the impact of CEOs who experienced the Great Chinese Famine during their sensitive period on firm risk-taking. With a longitudinal data of Chinese publicly listed companies from 2006 to 2017, it is postulated that CEOs who experienced the three-year famine are more risk-averse. In addition, the negative relationship between the CEOs’ early life experience of the famine and firm risk-taking is found to be stronger for non-state-owned enterprises and companies located in more liberalized markets, whereas the negative relationship is not affected by whether the CEOs have political connections. This article provides a new theoretical and practical perspective for the study of CEOs’ early famine experience and firm risk-taking.

The performance and corporate risk-taking of firms: evidence from Malaysian agricultural firms

PurposeThis study explores the effects of the performance and corporate risk-taking behaviour of agricultural firms. Despite its importance in mitigating climate change, the agricultural sector also faces global competition, market liberalisation, rapid technological advances and the starter of stricter quality and safety procedures, all of which require firms to take greater risks.Design/methodology/approachThis study explores this relationship by applying generalised least square (GLS), random effect methodologies (REM) and generalised method of moments (GMM).FindingsThe findings report a favourable relationship between firm performance and corporate risk-taking using a sample of firms from an emerging market.Research limitations/implicationsThe effects of these results for management practice and recommendations for further research were examined.Originality/valueWhile this empirical study used a sample focused on a single industry, most previous studies focused on multiple industries. The originality of this study is its analysis of how firm performance affects corporate risk-taking in the Malaysian agriculture sector.

Board diversity and firm risk-taking in the tourism sector: Moderating effects of board independence, CEO duality, and free cash flows

This study examines the effect of board diversity on risk-taking for tourism firms and analyzes the moderating effect of board independence, CEO duality, and free cash flows in this proposed relationship. Using a composite index of board diversity and a sample of tourism firms from the US hotel, restaurant, and airline industries, we find that greater board diversity leads to lower risk-taking, measured in standard deviation of return on assets. Moreover, we report that the risk-reduction effect of board diversity is more profound when tourism firms have less board independence and less free cash flows for investments. When board diversity is decomposed into relation-oriented and task-oriented diversity attributes, we find that only the task-oriented diversity is influential in reducing firm risk-taking for tourism firms. Akin to main analysis, the board independence and free cash flows are significant moderators of the relationship between task-oriented diversity and firm risk-taking.

The relationship between managerial attributes and firm risk-taking

PurposeThe main objective of the paper is to examine the relationship between managerial attributes (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) and firm risk-taking on the Tehran Stock Exchange (TSE).Design/methodology/approachThe study’s sample comprises 150 companies listed on the TSE from 2011 to 2017. Risk-taking is calculated as the standard deviation (SD) of stock return. Explanatory factor analysis was performed to calculate the weight of each of the five variables managerial ownership, board independence, chief executive officer (CEO) tenure, board compensation and CEO duality as a proxy for managerial entrenchment. The study by Anderson and Hsiao (1982) was also used to calculate managerial myopia, and the study by Schrand and Zechman (2012) was used to calculate managerial overconfidence.FindingsThe results indicate that the effect of managerial entrenchment and managerial myopia on risk-taking of listed firms on the TSE is positive and significant, implying that an increase in CEO entrenchment is likely to give rise to risk-taking. The authors conjecture that this finding could be due to the investment projects impairing the firm performance in the long run. Furthermore, the effect of managerial overconfidence on listed firms' risk-taking on the TSE is significantly negative. Since overconfidence is one of the traits of narcissism and corporate managers tend to be encouraged and admired, it is implied that they tend to make efficient and low-risk investments that ultimately reduce the firm risk-taking.Originality/valueSeveral theoretical studies show that managerial behavior is a determining factor in the economy. One of the reasons which justify the originality of this study is the context and institutional environment. Undoubtedly, managerial behavior (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) is expected to have some significant variations in developing countries compared to prevailing in developed countries, particularly in the Iranian stock market the economic sanctions. Furthermore, due to the direct impact of individuals' psychological and behavioral characteristics on their decisions and the effect of companies' risk-taking on increasing and decreasing shareholders and companies' wealth, this research is essential. Given the function of designed behavioral criteria for assessing risk-taking behaviors, the relationship between managerial attributes and firms' risk-taking is still unclear and investigated in this study.

Trade policy uncertainty and firm risk taking

Using data for firms listed in China from 2007 to 2019, this paper explores the relationship between trade policy uncertainty (TPU) and firm risk taking (FRT). It finds that TPU is negatively and significantly correlated with FRT. Meanwhile, the influencing mechanism estimates suggest that TPU increases firm financial constraint and operational risk, which, in turn, negatively affect FRT. Further tests reveal that, when the ownership concentration and debt ratio are high, the negative effect of TPU on FRT is more pronounced.

CEO Compensation and Risk-Taking: Evidence from Listed European Hotel Firms

This paper examines the relationship between CEO compensation policies and financial performance in the European hotel sector. We analyze CEO cash-, equity- and total-compensation relationships with two accounting-based and two market-based financial performance proxies, including a bi-dimensional proxy formed by stock market return and risk. This bi-dimensional market-based financial performance proxy enables us to take a deep dive into the relationship between CEO compensation policies and firm risk-taking. We then analyze the nature of this relationship by decomposing market-based risk into systematic and idiosyncratic risk, using five alternative asset-pricing factorial models. Our results support a negative and significant relationship between CEO compensation policies and risk-taking by hotel firms. Moreover, we present evidence that relates this result directly with the idiosyncratic risk assumed by these European companies.

Risk committee, corporate risk-taking and firm value

PurposeThe authors empirically examine the impact of the stand-alone risk committee on corporate risk-taking and firm value.Design/methodology/approachThe authors argue that the existence of a stand-alone risk committee enhances the quality of corporate governance, which reduces corporate risk-taking and strengthens the firm value that might improve investor protection.FindingsThe authors find corporate risk-taking decline significantly for firms that have a stand-alone risk committee compared with firms that have a joint audit and risk committee. The authors also find that the presence of a stand-alone risk committee is positively associated with firm value.Practical implicationsThe evidence is consistent with the proposition that firms with a stand-alone risk committee can effectively evaluate potential risks and implement a proper risk management system.Originality/valueThis is the first paper that investigates the association between the existence of a stand-alone risk committee and firm risk-taking in a multi-industry setting. Also, our research extends the association between a stand-alone risk committee and firm value.

An Attention-Based Approach to How Narcissistic CEOs Influence the Board to Take More Risk

The consequences of CEO narcissism have become a popular topic in several management streams of late. Although it has been suggested that narcissistic CEOs are inclined to engage in greater corporate risk-taking, scholars have not considered how CEOs manage to enact these intentions in light of a critical mediating factor: CEOs generally must gain approval for such endeavors from the board of directors. Using the attention-based view, we theorize that narcissistic CEOs shape the board’s attention to and opinion of firm risk-taking by exercising their ability to manipulate the inclusion, framing, and discussion of risk-taking during board meetings. Utilizing a unique data set encompassing 88 public firms and 197 CEOs over 20 years, we tested our hypotheses by using corporate board minutes to observe how narcissistic CEOs influence boardroom discussion of risk-taking. Our results indicate that the tendency of narcissistic CEOs to increase firm risk-taking depends upon their ability to control the dialogue of board meetings. Moreover, we find that narcissistic CEOs influence the board of directors not so much by controlling the amount of attention devoted to risk-taking, but rather by shaping the type of attention (i.e., the positivity of the tone) given to risk-taking.

Measures of firm risk-taking: revisiting Bowman’s paradox

PurposeThe purpose of this paper is to contribute to the existing literature on the relationship between firm-level risk and returns and to explore other ways of measuring firm risk-taking. Literature overwhelmingly shows a negative relationship between firm-level risk and returns based on accounting data, which is counter-intuitive from the rational perspective of risk-aversion. This paper revisits this so-called Bowman’s paradox by examining the wealth of literature on the topic and empirically tests alternative measures of firm risk-taking that could provide a counter-argument on the existence of the paradox.Design/methodology/approachAfter formulating the criteria for such a measure, potential measures of firm risk-taking were developed based on variability of some key financial ratios and empirically tested using US listed companies’ data for several time periods from 1992 to 2016. Literature has explored the use of these financial ratios (e.g. R&D expenses as percentage of sales) based only on their magnitude. This paper is novel in that it examines the variability and not just the magnitude of these parameters.FindingsResults showed the same counter-intuitive negative relationship between firm risk-taking and returns but the paper was able to identify an area for future theory development that hopefully will lead to a firm risk-taking measure that would exhibit the elusive positive relationship with returns.Originality/valueThe literature review of this paper brought together and provided a succinct classification of the various explanations for Bowman’s paradox that allowed the identification of a potentially rich area of research. It identified a gap in the literature which is the formulation of suitable measures of firm risk-taking and made investigations in this area.

Risk Committee, Corporate Risk-Taking, and Firm Value

Purpose: We empirically examine the impact of the stand-alone risk committee on corporate risk-taking and firm value. Design/methodology/approach: We argue that the existence of a stand-alone risk committee enhances the quality of corporate governance, which reduces corporate risk-taking and strengthens the firm value that might improve investor protection. Findings: We find several measures of risk-taking decline significantly for firms that have a stand-alone risk committee compared with firms that have a joint audit and risk committee. We also find that the presence of a stand-alone risk committee is positively associated with firm value. Practical implications: The evidence is consistent with the proposition that firms with a stand-alone risk committee can effectively evaluate potential risks and implement a proper risk management system. Originality: This is the first paper that investigates the association between the existence of a stand-alone risk committee and firm risk-taking in a multi-industry setting. Also, our research extends the association between a stand-alone risk committee and firm value.

Does gender diversity among new venture team matter for R&D intensity in technology-based new ventures? Evidence from a field experiment

This paper reports on a field experiment conducted to estimate the impact of the gender diversity of new venture top management teams (TMT) on research and development (RD there are no gender differences regarding decision making in terms of firm risk-taking. Our findings may belie the common perception that women are, in general, more risk-averse than men. The implication of our study is that we do not support (or deny) the “business case” for female managers on TMTs. Likewise, we find no evidence of any negative effect either. Our evidence implies that the representation of top female managers should be based on criteria other than innovation behavior in the early stage of a new venture growth and development process. The study extends our understanding of the effects of TMT composition and contributes to research on innovation behavior and new venture teams.

Does board gender diversity affect firm risk-taking? Evidence from the French stock market

Drawing from a sample of French companies that made up the SBF 120 index over the period 2006–2010 (before the enactment of the Cope–Zimmermann law on gender quotas on boards), this paper investigates the relationship between board gender diversity and firm risk-taking (measured by the variability of the return on assets). Using a generalized method of moments estimation, no evidence is found to support the assumption of a significant relationship between women on corporate boards and firm risk-taking. These results potentially can be relevant for policy makers and academic research.

The impact of managerial stock option on firm risk taking: evidence from China

Purpose- This study is to investigate the firm risk-taking which influence by managerial of stock option. Methodology- The empirical analysis of multiple regressions with a robustness test of OLS and STATA software were used in this study. In order to make our findings more practically and reliable, more robust tests have been applied, such as Fixed Effect Model with cluster standard error, Propensity Score Matching Model (PSM) and Dummy Effect Model. Findings- stock option processing management has a significant positive impact on firm risk taking, market to book value, firm leverage, block-holder, asset turnover and portfolio have significant positive effects on firm risk taking. Firm size and state ownership have a significant negative impact on firm risk taking. Board does not influence on firm risk. It suggests top managers tend to use their power in managerial operation of stock option to manipulate earnings through employee stock option schemes, which causes companies to face high risk. Last result revealed that state ownership is helping to keep an eye on the corporation operation as a monitoring person. Conclusion- Based on the results, this study delivered essential implication policy for investors, regulators, top manager as well as governance to take action in order to improve equity incentive system more effectively as well as to build healthier security markets in the world.

Employee Inside Debt and Firm Risk-Taking: Evidence from Employee Deposit Programs in Japan

Abstract Unlike broad-based equity ownership by employees, ownership of company debt by rank-and-file employees has not received much attention. We argue that company debt held by employees in the form of in-company deposits can monitor risk-taking and facilitate risk discovery. Employee deposits have been historically widely used in Japan. For a sample of 2,104 Japanese firms, using an identification strategy that utilizes a new law in 2003 that changed the priority of employee deposits in bankruptcy and led to large-scale withdrawals of employee deposits, we find that employee deposits mitigate firms’ risk-taking behavior and reduce the agency cost of debt. Received November 2, 2018; editorial decision May 1, 2019 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Managerial Empowerment and Firm Risk-Taking

This study highlights the importance of political ties of top management on firm risk-taking preferences. This study divides the managerial powers into six categories and then tries to check the im...

Financing Constraints, Radical versus Incremental Innovation, and Aggregate Productivity

I provide new empirical evidence on the negative relationship between financial frictions and productivity growth over a firm’s life cycle. I show that a model of firm dynamics with incremental innovation cannot explain this evidence. However, further including radical innovation, which is very risky but potentially very productive, allows for the joint replication of several stylized facts about the dynamics of young and old firms and the differences in productivity growth in industries with different degrees of financing frictions. These frictions matter because they act as a barrier to entry that reduces competition and the risk-taking of young firms. (JEL D22, D24, D25, G32, L25, L60, O31)

Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans

AbstractWe study a widespread yet under-explored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.Received March 2, 2017; editorial decision January 24, 2019 by Editor David Denis. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

A Study on the Effect of Tax Loss Offset System on Firm Risk-taking under Corporation Tax Law

A Study on the Effect of Tax Loss Offset System on Firm Risk-taking under Corporation Tax Law

The PBGC Premium and the Pension Plan's Risk-Taking: Should the PBGC Take the PPF As an Example?

This paper focuses on the way the PBGC premiums should be defined. In the current debate, a better risk adjustment is sought, and the PPF is given as an example. The paper analyzes the effect the PBGC premium form has on the sponsoring firm's risk-taking in its pension plan. We show that risk-taking increases (decreases) when the actual bankruptcy probability of the firm is higher (lower) than the proportion of underfunding taken into account in the premium. Numerical results suggest that if the PBGC increased the current underfunding proportion, risk-taking would be reduced, albeit slightly. The paper's conclusion is that adopting risk-adjusted premiums of the PPF-type is an advisable measure for the PBGC. The effect of the insurance contract on risk-taking would be then eliminated. However, whatever the premium form, the problem of firms in financial trouble will remain unsolved, and other measures than risk-adjusted premiums are needed to prevent their risk-seeking behavior.

The effects of environmental sustainability and R&D on corporate risk-taking: International evidence

In this paper, we ask an important question: can firm-level environmentally sustainable practices and research and development (R&D) intensity individually and jointly affect corporate risk-taking? Using firm-level data from 41 countries spanning 2002–2013, we find environmentally sustainable practices and R&D intensity enhance the risk-taking of firms. Voluntary sustainable practices generate a positive and significant effect on corporate risk-taking. We also find that country-level determinants play a complementary role. Firms operating in countries with better intellectual property rights protection and overall infrastructure benefit more from environment-friendly practices and R&D intensity. Further, we find that ESI has a positive effect on risk taking in countries with higher CO2 emissions per capita, energy usages per capita and more stringent environmental policies. These results are robust after correcting for potential endogeneity, alternative measures of R&D intensity or ESI score. Overall, our findings provide key insights on policy recommendations at the national and international levels.