Firm Risk Research Articles

Do creditors price climate transition risks? A natural experiment based on China's carbon emission trading scheme

The pursuit of carbon neutrality by China signifies the country's resolute commitment to proactively tackle climate change. However, traditional energy firms, which function as the pillars of the domestic economy, surely face a significant challenge in the form of "decarbonization." In light of climate transition risks, this study employs the difference-in-difference (DID) model to investigate the impact of China's carbon emission trading scheme (ETS) on the debt financing costs of listed high-carbon firms (HCFs). The findings indicate that the significant increase in debt financing costs of HCFs under ETS can be attributed to the "dual vulnerability" that HCFs exhibit, consisting of heightened credit risk and a diminished environmental reputation. Specifically, the implementation of ETS regulations results in elevated operating costs and future cash flow risks for firms, which subsequently escalates credit risk. This is especially true for establishments situated in regions characterized by high carbon emissions and high scores on the Low Carbon Economic Transition Assessment Index. Such data suggests creditors are progressively placing greater emphasis on the reputation of low-carbon environmental practices. Additional study suggests that firms that possess inferior qualification endowments, less external financing capabilities, and weaker risk-diverting capabilities are more susceptible to the effects of ETS and are subjected to more transformation pressure. The findings of this research hold substantial importance in terms of advancing ETS initiatives in a concentrated, phased, and clustered fashion, guaranteeing technological advancements and seamless transitions for HCFs throughout the carbon peak cycle, and eventually bolstering society's climate adaptability as a whole.

The impact of female directors on firm risk: A study in the context of G6 countries

he main objective of this study is to assess the impact of female directors on firm risk in the G6 countries (all G7 countries except Italy, since data for Italy are not available). A total of 4617 firm-year observations were collected from six countries: the United States, Japan, Germany, the United Kingdom, France, and Canada. The firm risk measures (risk1 and risk2) are calculated as the ratio of a firm profitability to volatility of profitability. These risk measures capture the risk-seeking behavior of the firm. These ratios are a comprehensive measure of risk-seeking behavior since they capture the decisions made by the incumbent management related to the firm’s operations. The results show that the presence of female directors beyond a threshold point reduces firm risk in the total dataset as well as in individual countries. Interestingly, Europe as a continent and all European countries individually have the highest impact of the presence of female directors above the threshold. In the case of Japan, the presence of female directors has the least influence on firm risk

Board Effectiveness and Firm Risk: The Moderating Role of ESG Performance

Improved firm governance in terms of board effectiveness can lower firm risk through the adoption of less risky financial policies. ESG (environmental, social, and governance) performance can strengthen the impact of board effectiveness on firm risk as companies are motivated to act in stakeholders’ interests. This research provides empirical evidence on these premises in the Southeast Asian context. This study used 380 observations from 76 non-financial companies in the Philippines, Malaysia, and Singapore for the 2015–2019 period. The data were analysed using the fixed-effects panel data method. The results show that the board effectiveness has a marginally significant effect in reducing company risk. In addition, when the effectiveness of the board interacts with ESG performance, the moderating role of ESG can strengthen its influence in reducing corporate risk. The results have implications for policymakers, investors, corporate executives, and those charged with governance to include ESG in corporate strategy with continuous monitoring from the board to help reduce corporate risk. Corporate sustainability initiatives in the form of ESG performance become more important, especially in the Anthropocene era. This study provides empirical evidence on the link between ESG, firm risk and the role of the board monitoring function.

The role of supply chain integration in the risk management of circular economy: a multiple case study in the furniture industry

Supply Chain Integration (SCI) has attracted increasing attention in Supply Chain Risk Management (SCRM) literature as it could be a very useful tool for risk mitigation. At the same time, companies in several sectors are experiencing a transition towards more circular and sustainable business models, which poses new challenges and risks for firms. Despite the relevance of integrative practices in supply chains to deal with risks and uncertainties, evidence about the role of SCI for dealing with risks of Circular Economy (CE) is still lacking. The focus of this paper is on the causal link between SCI and SCRM in a circular economy context, with the main aim of investigating the effects of SCI and SCRM practices combined with CE on company performance. For this research, a multiple case-study approach was adopted involving several companies at different levels in the furniture industry. The results are expected to guide companies in their transition towards CE business models, being able to better deal with CE risks through integrative practices and obtaining an overall increase of efficiency, particularly in costs, due to the optimization and green use of waste materials.

Innovations and Ambidextrous Transition: Mitigating Earnings Management and Firm Risk in China

Innovations and Ambidextrous Transition: Mitigating Earnings Management and Firm Risk in China

Tournament incentives, credit default swaps trading, and corporate policies: The interplay of managerial and creditor incentives

This paper investigates how the interaction between managerial and creditor incentives affects corporate risk and policies. Using a sample of 16,513 firm-year observations from 2001 to 2014, we find that credit default swaps (CDS) trading leads to higher stock return volatility and leverage, yet lower cash flow volatility and capital expenditure. Meanwhile, tournament incentive is associated with higher firm risk and more aggressive corporate policies. Further, we find that the interaction between tournament incentives and CDS trading alleviates the overall effect of intra-firm tournament incentives and CDS trading on firm risk and corporate policies. Altogether, our results suggest that risk-averse managers balance risk-taking incentives and creditor incentives when making corporate decisions and, hence are less sensitive to tournament incentives due to their concerns about exacting empty creditors problems in CDS-referenced firms. This study contributes to the literature by providing initial insights into the interaction effects between managerial and creditor incentives.

Board Gender Diversity, Firm Risk, and the Intermediate Mechanisms: A Meta-Analysis

Board Gender Diversity, Firm Risk, and the Intermediate Mechanisms: A Meta-Analysis

Risk disclosure and stock price crash risk: Evidence from Chinese listed firms

This study constructs a risk-related dictionary to quantify firm risk disclosure and explores its association with stock price crash risk. Based on Chinese A-share listed companies from 2013 to 2020, we find that (1) risk disclosure is negatively associated with stock price crash risk; (2) this association is more significant in non-state-owned firms, firms in regions with poor legal systems, and during bull markets; and (3) analyst forecasts and investor sentiment have mediating effects. Evidence shows that mandatory requirements for risk disclosure are meaningful and suggests that regulators improve risk disclosure norms to promote Chinese capital market development.

Does ESG performance influence accounting- and market-based firm risk

Does ESG performance influence accounting- and market-based firm risk

Does ESG performance influence accounting- and market-based firm risk

Does ESG performance influence accounting- and market-based firm risk

The effect of ownership concentration on firm risk and value: evidence from Germany

Aim: This paper aims to understand the effects of between ownership concentration on firm risk and value.
 Design / Research methods: The author focuses on the largest publicly listed 91 German corporations in the time period 2010 to 2021. The resulting sample contains between 928 and 1051 observations and is analysed through a pooled OLS regression analysis. Ownership concentration is measured in terms of the number of blockholders, the size of the largest shareholder, and the Herfindahl Index of the ten largest shareholders. Firm value is captured with Tobin’s Q and firm risk is computed as the annualised daily stock price volatility.
 Conclusions / Findings: It is found that ownership concentration affects firm risk significantly negatively. Moreover, results suggest an inverse U-shape relationship between ownership concentration and firm value. This relationship can be explained by combining the negative effects of rising ownership concentration on firm risk with its implications for the creation of firm value.
 Originality / Value of the article: The German market has used to have a network-like structure with a concentrated ownership structure. However, over the past two decades, it transformed towards a more Anglo-Saxon-like and market-based structure with a rather dispersed ownership structure. Furthermore, factors which govern the relationship between ownership concentration are used to explain parts of the relationship between firm value and ownership concentration in a new way, thereby adding value to understanding the latter, highly debated, relationship.

Short-Selling on Corporate Investment: Korean Evidence

Purpose: Prior studies suggest that an informative stock price helps corporate investment decisions. Since short-selling improves the informativeness of stock prices, short-selling could influence corporate investment. This study examines this conjecture.
 Design/methodology/approach: Using KOSPI-listed firm data, this study examines whether short-selling affects quantitative aspects, that is, amount, and qualitative aspects, that is, risks and profitability, of R&D or capital expenditure.
 Findings: The results show a distinct contrast between the two types of investment. After short-selling, a decrease in R&D investment i s observed; however, capital e xpenditure i ncreases i n firms that i nvest much i n capital expenditure. A post-short-selling increase in R&D increases firm risk, but capital expenditure does not. Post-shortselling R&D investment is tied to long-term profitability; however, except for large firms, capital expenditure does not contribute to the increase in long-term profitability.
 Research limitations/implications: This study provides supporting evidence that improved informativeness of stock prices improves investment efficiency, not only through R&D investment but also through capital expenditure. However, by examining the topic in the big picture, this study leaves out the influence of several factors that can affect investment decisions.
 Originality/value: This is one of the rare studies that examines the real impact of short-selling.

Effect of Environmental, Social, Governance (ESG) and Strategic Deviation on Firm Risk: Evidence from Manufacturing Sector in Emerging Market Asia

The notion of sustainable development has gained widespread acceptance in the realm of social development. As a result, firms and their stakeholders are increasingly focusing on external elements such as environment, society, and governance (ESG). This study investigates the impact of ESG on firm risk measured by cash flow volatility. This study further examines whether strategic deviation moderates the relationship between ESG and firm risk. This research considers a sample of 139 manufacturing firms available in Refinitiv between 2018 and 2022 and applies the fixed-effect model. This study is a valuable contribution to the field of research on environmental, social, and governance (ESG) factors and their impact on strategic management. Specifically, it examines how ESG considerations and strategic deviation affect the level of risk faced by manufacturing firms. The result shows that ESG significantly reduces cash flow volatility but strategic deviation is insignificant in both affecting cash flow volatility and moderating the relationship of ESG and cash flow volatility. This study will serve as a valuable resource for managers in manufacturing organizations, providing them with insights into the importance of considering environmental, social, and governance (ESG) issues. The findings of this study highlight the impact of ESG and strategic considerations on cash flow volatility.

ANALYSIS OF THE VALIDITY OF TRADE-OFF AND PECKING ORDER THEORIES IN CAPITAL STRUCTURE DECISIONS OF SUSTAINABLE COMPANIES

In the study, it is aimed to test the validity of the Pecking Order Theory and Trade-Off Theory, which are among the theories on which the capital structure decisions of companies, which are extremely important in terms of firm value, are based, on sustainable companies included in the BIST Sustainability Index, since they carry out activities to reduce the cost of capital. In the study, the total indebtedness ratios, long-term indebtedness ratios and short-term indebtedness ratios of 40 companies included in the BIST Sustainability Index between 2015-2021, as well as liquidity, asset structure, non-debt tax shield, tax, profitability ratio, change in assets, firm size and the relationship between firm risk is examined. In general, the capital structure preferences of sustainable firms support the Trade-Off Theory. In addition, it was revealed that the dummy variable created for the periods when companies entered the BIST Sustainability Index was statistically significantly and positively related to their borrowing behavior. This result is interpreted in the direction of an increase in the borrowing rates of the companies after they are included in the index.

Corporate Sustainability and Stock Price Crash Risk

Contemporary society requires enterprises to improve the ability of sustainable development, ESG as a major indicator of corporate sustainability, and the study of its impact on stock price crash risk has attracted the attention of academia and society. This paper takes Chinese A-share listed companies as the research object to empirically test the impact of corporate sustainability on stock price crash risk. It is found that good ESG performance implying satisfactory firm sustainable development can alleviate information asymmetry and principal-agent problem, thus reducing stock price crash risk. Further heterogeneity test reveals that ESG has a stronger curbing effect on stock price crash risk for firms with low CFO. The final conclusion also passed the robustness test. The findings not only provide empirical evidence for the construction of ESG system and the suppression of stock price crash risk in emerging market countries, but also have some practical significance in promoting both corporate and so-cial sustainable development.

Sustainable Compliance Programs in Complex Organizations

I identify and test the empirical implications of complexity theory to investigate the effectiveness of the firm’s risk management program in monitoring compliance program activity. I provide a direct link between the quality of Business Regulatory Compliance Unit (which executes and oversees the compliance program implementation) and the overall risk management quality of the firm. I use a multi-method design, incorporating survey questionnaires and econometric multivariate analysis of a sample of European firms. I find a relationship between the risk management exposure of European firms and the quality of their internal control department. I also find a strong relationship between earnings at risk for UK firms and asset-liability at risk for financial firms, but only a weak relationship between cash flow at risk and internal audit quality for European firms. The quality of internal compliance business units is strongly positively related to corporate performance over time.

When does CSR payoff?

AbstractWe investigate whether firms engaging in corporate social responsibility (CSR) can preserve firm value during normal and unprecedented exogenous adverse events. Our evidence shows, in regular times, a negative relation between CSR engagement and firm value, but under adverse economic conditions, CSR protects firm value by decreasing firm risks. We also find that firms with high managerial attributes engage in greater CSR activities that benefit shareholders in both normal and aberrant financial times. Despite the controversy surrounding CSR, our evidence points out that CSR can be viewed as a set of intangible assets that can improve firm value across good and bad economic states when firms are run by high‐attribute managers.

Tax Avoidance and Firm Risk: New Insights from a Latent Class Mixture Model

ABSTRACT We examine the relations between tax avoidance and two components of firm risk (priced risk and idiosyncratic risk) using latent class mixture models. OLS regressions suggest that tax avoidance is negatively related to both priced risk and idiosyncratic risk. However, results from latent class mixture models reveal that 35.6 (58) percent of the sample exhibits a significant positive association between tax avoidance and priced (idiosyncratic) risk and firm characteristics are strikingly different across the latent classes. We use these differences to develop parsimonious models to predict latent class assignments, which we then use to demonstrate that firms predicted to have a positive relation between tax avoidance and priced risk or idiosyncratic risk have more negative future tax outcomes, including higher relative cash tax rate volatility, larger additions to tax reserves, larger payouts to tax authorities, and more negative tax-related news coverage over the following three years. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; G12; D81.

Financial market development and corporate risk management: Evidence from Shanghai crude oil futures launched in China

This paper investigates the impact of China's crude oil futures (COF) on risk management at the firm level in China. The empirical results based on a sample from 2014 to 2021 show that the launch of China's COF significantly reduces idiosyncratic risk in energy-dependent firms, and this conclusion remains significant even after a series of robustness tests. Mechanism analysis reveals that the launch of China's COF reduces firms' idiosyncratic risk mainly through the cash flow and volatility within the corporate internal channels and the attention from external market information channels. Further analysis finds that the inhibitory effect is more pronounced among large firms and firms with higher competitive pressures. Our study contributes firm-level evidence on the relationship between China's COF and corporate risk management and provides insights into energy policy.

The mediating role of firm risk: The case of the insurance sector in Saudi Arabia

This study aims to examine the mediating effect of firm risk on the relationships between board structure and firm performance. The multivariate panel data regression technique is employed to analyse the mediating impact of firm risk on 27 listed insurance companies on the Saudi Stock Exchange (Tadawul) from 2016 to 2021. The findings of this study indicate that firm risk partially mediates the relationship between audit independence and Tobin's Q. In contrast to the existing literature, the study reveals that boards composed of independent members may lack effectiveness in their monitoring role, leading to higher risk-taking behaviour. This paper contributes to the literature on corporate governance and firm performance by examining the association through the lens of firm risk.