Firm Risk Research Articles

The impact of corporate governance and firm-specific characteristics on dividend policy: an emerging market case

PurposeThe present study aims to investigate the impact of corporate governance proxies by ownership structure and firm-specific characteristics, i.e. firm size, leverage, growth opportunities, previous year dividend, firm risk, profitability, and liquidity on dividend behavior of the Pakistan Stock Exchange (PSX) listed firms.Design/methodology/approachFinal sample of the study consists of 140 PSX-listed firms. The study covers a period of six years, starting from 2015 to 2020. Dividend payout dummy, dividend payout ratio, and dividend yield were used to assess the dividend behavior of the sample firms. The appropriate regression procedures (logistic, probit, ordinary least square (OLS), and fixed effect regression) are used to test the study hypothesis. To check the robustness of the result, a system GMM estimation technique is also used in the present study.FindingsThe study reveals that institutional ownership, foreign ownership, and individual ownership have a significant positive whereas managerial ownership has a significant negative impact on the dividend decision of sample firms. Among firm-specific characteristics, it was found that liquidity, profitability, and the previous year's dividend were significantly positive, while growth opportunities were significantly inversely associated with dividend payout decisions of PSX-listed firms.Practical implicationsThis study sheds light on the relationship between dividend policy, ownership structure, and firm-specific factors in the context of an emerging market like Pakistan. The study's findings have important implications for managers, minority shareholders, lawmakers, and investors looking for guidance on the dividend policy of publicly-traded non-financial firms.Originality/valueThe literature lacks studies that together analyze the ownership characteristics and firm-specific variables on dividend decisions, particularly in the context of developing economies. The current study aims to fill this gap.

CEOs' general managerial skills and corporate risk taking subject to the moderator of CEO tenure

AbstractIn this study, we examine the relation between chief executive officers' (CEOs') general managerial skills and firms' risk‐taking behaviour. We find that generalist CEOs are associated with significantly higher firm risk, with the association decreasing significantly with CEO tenure. We propose the following managerial skills transformation explanation: the longer a CEO stays with a firm, the less general and more firm specific the CEO's skills and knowledge become; therefore, any effect of the CEO's general managerial skills only appears in the early years of tenure.

Corporate social responsibility report readability, credit ratings and cost of borrowing

PurposeThis study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related information in their assessment of firm’s creditworthiness.Design/methodology/approachThe authors collect stand-alone CSR reports published by Fortune 500 companies from 2002 to 2014 and use file size as a readability measure to investigate the impact of stand-alone CSR reports’ readability on firms’ credit ratings and cost of borrowing.FindingsThe authors find that firms with higher CSR report readability enjoy higher credit ratings and lower costs of bank loans, suggesting that rating agencies and banks perceive lower default risk for firms with more readable CSR reports. Further analysis indicates that the positive association between CSR report readability and credit ratings is more pronounced for firms with high CSR performance. Conversely, the negative association between CSR report readability and bank loan spreads is more pronounced for firms with low CSR performance and credit quality, suggesting complementary roles of rating agencies and banks in their use of CSR reports.Originality/valueOverall, the results highlight the importance of improving the textual characteristics of CSR reports, especially readability, in reducing information risk in the credit market.

The role of communication quality, relational commitment, and reciprocity in building supply chain resilience: A social exchange theory perspective

Although supply chain risk management is a process that can be actualized through collaboration and communication in supply chains, little is known about how social factors can lead to supply chain resilience (SCR). The present study evaluates the relationship between supply chain members as social relationships and explores their role in SCR. Following the social exchange theory perspective, communication quality, reciprocity, and relational commitment are examined as the potential antecedents of SCR. The mediating role of communication quality in linking reciprocity and relational commitment to SCR is also investigated. Partial least squares structural equation modeling is used to test the research hypotheses and analyze the data obtained from prominent executives of manufacturing firms. Our findings indicate that communication quality is an imperative factor in explaining SCR. We also found that communication quality mediates the relationship between relational commitment and SCR and between reciprocity and SCR. In line with previous literature, SCR is positively related to supply chain risk management performance, empirically supporting the proposed value of SCR for firm risk management processes. This paper advances a new front in SCM research by adopting the social exchange theory perspective and empirically examining the role of communication quality, relational commitment, and reciprocity.

Working Capital Management and Stock Performance: Evidence from an Emerging Market

Previous research found a negative relationship between net working capital (NWC) and firm risk without accounting for investor protection. Bangladesh is different. We find a positive relationship between NWC and firm risk in an environment with weak governance and lax protection of property rights. Higher NWC must maintain to balance firm risk. Financial reporting quality (FRQ), liquidity risk, revenue uncertainty and weak capital market access have impact on firm risk. Poor FRQ adversely affects cost of capital and also limited financing choice. Changes in NWC have a significant impact on stock performance in firms with slower sales growth and less access to external capital. Our finding’s reliability is supported by both the fixed-effects panel and GMM regressions. The results have implications for Bangladeshi investors and firm managers as well as for other emerging markets with limited capital market access, high cost of bank debt and weak enforcement of property rights.

Foreign shareholders, relative foreign policy uncertainty and corporate cash holdings

Studies have shown that foreign investors hedge risks stemming from economic and political uncertainty in the home country through outward investment. This paper studies how foreign investors' home country risk affects their overseas investment and the host country firms' corporate cash holdings. We find that relative foreign EPU, defined as the difference between foreign investors' home country EPU and the host country of investment EPU, negatively impacts the host country firms' cash holdings through their influences on managerial decision-making. This negative relationship arises from firms' precautionary and transaction motives as foreign investors perceive lower corporate risk and better investment opportunities in the host country firms. Good corporate governance is also instrumental in yielding this negative relationship. The reduction in cash holdings due to high relative foreign EPU is more pronounced if foreign investors' home country legal environment is weaker, the two countries are further apart, and there is little trade partnership between them.

Enterprise Resource Planning System Usage and Stock Price Crash Risk

We examine whether Enterprise Resource Planning system (ERP) usage affects the stock price crash risk of Chinese firms, and whether the effect differs between state-owned enterprises (SOEs) and non-SOEs. We find that ERP usage is associated with lower stock price crash risk, but this pattern is largely concentrated in non-SOEs, consistent with our arguments that more acute shareholder-manager agency problem and more organizational rigidity can inhibit the successful assimilation of ERP. The results are further confirmed by a difference-in-differences analysis exploiting the privatization of SOEs as a negative shock to their shareholder-manager agency problem and organizational rigidity. Three channels help explain why ERP usage helps lower stock price crash risk: it improves the quality of internal control, reduces the chance of financial restatements, and mitigates information asymmetry, and all effects are concentrated in non-SOEs. Our study is among the first to examine how ERP usage affects stock price crash risk – an overall outcome measure of a firm's information environment. Using SOEs vs. non-SOEs as a powerful measure of the shareholder-manager agency problem and organizational rigidity, it also represents the first test of the moderating effect of agency problem and organizational rigidity on the effectiveness of ERP usage.

Shareholder litigation and bank risk

Does a decrease in shareholder litigation enhance managers’ monitoring efforts by ensuring adequate firm risk management? We explore how state universal demand (UD) laws (which limit shareholder litigation as a mechanism to discipline managers), affect bank holding companies’ (BHCs) risk. Using a difference-in-differences analysis, we show that BHCs reduce their tail risk exposures after the implementation of UD laws, which is achieved by improving loan asset quality. Indeed, BHCs appear to apply stricter contract terms for syndicate loans to risky and opaque borrowers. We also show that UD law implementation leads to changes in BHC board composition by increasing the proportion of outside directors, the number of independent directors in audit committees and the number of independent directors with financial expertise.

COVID-19, firm characteristics and stock volatility: new evidence from the Indian tourism sector

PurposeThis paper provides new evidence on Indian tourism firms by investigating the role of a firm's financial conditions typified by its leverage, earnings, size, cash holdings, and excess cash in moderating the pandemic-led idiosyncratic volatility in its stock prices.Design/methodology/approachThe authors employ a firm-level panel comprising 82 publicly-listed tourism firms from India. Firm risk is estimated for the period beginning January 2020 to December 2020.FindingsThis paper finds non-linear effects of the pandemic on the idiosyncratic risk of the sample firms. Precisely, stock price volatility rises, but as the market absorbs this information, volatility subsides even as the disease spreads further. Further, lower levels of past debt and earnings and higher cash holdings ameliorate the pandemic's effects on tourism firms' risk. Contrasting the view that “excess” cash reflects poor operational performance, we show that “excess” cash firms are better prepared to face the adverse effects of the pandemic.Research limitations/implicationsThis study’s sample period fully encompasses the first wave of the pandemic (January–December 2020) of the novel coronavirus infection spread.Originality/valueTo the best of the authors’ knowledge, this is the first study to assess the moderating effects of company fundamentals on the risk of Indian tourism firms. In doing so, the authors account for non-linear effects of the pandemic on firms' idiosyncratic volatility over time.

Does organization capital increase firm risk? Evidence from firms with human resource executives

We investigate whether and how organization capital affects firm risk using the presence of human resource executives (HREs) in top management teams as an indicator of superior human resource management, a specific component of organization capital. Based on a comprehensive sample of the largest firms in the U.S., we find that the stock market performance of firms with HREs is significantly worse than that of other firms at the worst times for the market. We also find that firms with HREs are more likely to be poor stock-market performers at the worst times for the market even if we control for other factors known to affect firm risk. The results suggest that firms with HREs and thus greater stock of organization capital are fundamentally riskier than other firms.

Fifty shades of CEO duality: CEO personal risk preference, duality and corporate risk-taking

PurposeThis study investigates whether and how chief executive officers (CEOs) with personal risk-taking preference (expressed in owning a pilot license) will act differently when they are vested with additional power serving as board chairs.Design/methodology/approachRegressions analyses are performed using a sample of Standard and Poor’s (S&P) 1,500 firms with available data during 1996–2009. CEO's risk-taking outcomes are measured using firms' total risk, idiosyncratic risk and research and development expenditures (R&D) investment.FindingsFirms led by pilot CEOs have greater firm risks, yet CEO duality attenuates the relationship. Further channel tests show that CEO duality suppresses CEO's risk-taking tendencies through managers' reputation concerns.Research limitations/implicationsThe findings highlight the importance of incorporating human factors into consideration of appropriate governance structures for a firm. Future studies can expand the existing data and further explore the relationship between human factors and governance structures on other firm strategies.Practical implicationsRegulators may focus mainly on regulatory setting based on the “best practice” of governance yet overlook human influence in corporate dynamics. For shareholders, hiring managers with distinct styles will change corporate outcomes but different governance mechanisms could be devised to adapt to CEOs with various personalities.Originality/valuePrior studies show that both CEO personal preferences and firms' governance structure affect corporate policies, and this paper complements prior studies by exploring how the two may interact to shape corporate policy and its outcomes. This paper also adds to the literature showing that CEO duality could serve a disciplinary role.

The internal mechanism of corporate social responsibility fulfillment affecting debt risk in China: analysis of intermediary transmission effect based on degree of debt concentration and product market competitive advantage

Abstract This paper takes the degree of debt concentration and product market competitive advantage as intermediary variables to explore the internal mechanism of the impact of CSR fulfilment on firm debt risk. It is found that the fulfilment of CSR can reduce the debt risk of firms by dispersing the degree of debt concentration and enhancing the competitive advantage of product market. The mediating effect of the degree of debt concentration has a direct impact on the competitive advantage of a product market and is particularly obvious in private firms and firms in the eastern region of China.

Antecedents of Audit Fee Paid by Trade and Service Companies that Listed in BEI for 2019-2020

The audit process is one of the tools used to handle the agency problem that may happen within a company. The audit process may become the most effective tool that only auditors that can execute the audit process, whether the internal auditor that works within the company or the external auditor that performs the audit process on behalf of the public accounting firm. To complete the audit process, each company will have to pay the audit fee for the external auditor and public accounting firm. This research analyzed the factors that may affect companies’ audit fees, from the board of commissioners size, audit complexity, firm risk, and the audit firm size being used by the public companies. The multiple linear regression analysis results show that all of these variables are found to affect the audit fee that was paid by the trade and service companies. Lastly, all the factors were found to affect the audit fee simultaneously. As an effort for companies to reduce the audit fee, they need to be concerned about these factors. Keywords: Audit Fee, Audit Complexity, Firm Risk, Public Accounting Firm’s Size, The Board of Commissioners Size

Pengaruh Tata Kelola Perusahaan Terhadap Kinerja Perusahaan dan Risiko Perusahaan

Company performance is the ability of a company to manage existing resources so that it can provide value to the company. In addition to the company's performance, the important thing to consider is the company's risk. Even though a company has good management and business strategy, there is no guarantee that it will avoid company risk. Corporate risk is uncertainty in the future about the risks that will be faced by the company. The company's performance and company risk are of course greatly influenced by the actors who run the company. Governance is the main focus in developing company resources. The purpose of this study was to determine the effect of corporate governance on corporate performance and corporate risk. The research was conducted by taking data from Industrial and Chemical Manufacturing companies on the Indonesia Stock Exchange (IDX). Board composition, the board size, meetings, and audit committee as independent variables, and ROA and firm risk as dependent variables. The research was conducted with various statistical tests such as determining the estimation model including the Chow, Hausman, and Lagrange multiplier. F-test, Goodness of Fit test, and T-test were also carried out. The results showed that meetings had a positive effect on company performance and board size had a positive effect on company risk. The board composition and audit committee variables do not affect company performance and company risk. The results of this study can be used as a reference for companies in improving company performance and company risk management.

Indikator Keuangan dalam Laporan Keuangan dan Kebijakan Dividen

This study aims to analyze the relationship between the financial indicators contained in the financial statements and dividend policy. Companies that are listed on the Indonesia Stock Exchange and meet the criteria set out in the study are used as research samples. This study uses 631 observational data from 2017 - 2021 obtained from the company's official website and the Indonesia Stock Exchange. Panel data regression is used to examine the effect of each variable on dividend policy. The best regression model in this study is the Fixed Effect Model. This study shows that free cash flow; firm risk; and return on equity have a significant positive effect on dividend policy. In addition; market to book value ratio and net asset growth have a significant negative effect. Other variables used in this study do not affect dividend policy.
 Keywords: Dividend Policy; Profitability; Liquidity; Financial Ratios.

Is CSR linked to idiosyncratic risk? Evidence from the copula approach.

In this paper, we extend the research on the effect of corporate social responsibility (CSR) on firm risk by analyzing the CSR–idiosyncratic risk nexus and how CSR can be integrated as insurance in a global risk management strategy. First, the causality between CSR and risk was tested. Second, copulas were estimated to strengthen the existing results on the structure of the dependence between the different dimensions of CSR activities and idiosyncratic risk levels. The empirical analysis was conducted on a sample of 254 European-listed firms over the 2018–2020 period. The main results showed a directional causality effect between CSR and idiosyncratic risk, and the dependences were modeled between CSR and realized idiosyncratic risk. This allows a better understanding of the risk implications of CSR for investors, corporate managers, and policy makers.

Collusive behaviour, risk and performance of tourism firms

This paper aims to enrich social network and managerial powers theories by examining the effects of board-CEO friendship ties in tourism firms. Specifically, we focus on the association between the board-CEO social network ties (e.g. serving external boards together or sharing memberships at social organisations) and performance and risk-taking behaviour among tourism firms. The findings show that friendship ties between CEO and board members result in higher risk-taking, lower profitability and market values. In addition, professional ties (i.e. current and past employment) significantly impact tourism firms’ outcomes, whereas non-professional ties (i.e. education and other social organisations) do not. The findings prevail after controlling for the Covid-19 pandemic. However, friendship ties lead to better information sharing, resulting in more effective decision-making by board members.

Bridging the gap between stock price and bottom-line accounting numbers

We develop a method for extracting “other information” from the articulation between bottom-line accounting numbers and stock prices. We posit that “other information” captures future earnings growth originating from conservative accounting recognition principles as demonstrated by Penman and Zhang (2020) and Penman and Zhu (2022), as well as nonzero net present value investment opportunities. Our findings confirm that “other information” is strongly associated with various proxies for expected future earnings growth and firm risk attributes. Furthermore, we show how a structural expected return model incorporating our “other information” estimate can predict out-of-sample future stock returns and generate sizeable long-short return spreads.

Climate-risk materiality and firm risk

Managers are required to disclose material climate risk in Form 10-K, but their decision whether or not to disclose is confounded by the lack of consensus on whether climate risk is material to the firms, as well as uncertainty about enforcement of disclosure regulations. Using the SASB Materiality Map™ to proxy for market expectations of climate risk materiality, we test whether the association between disclosing climate risk in 10-Ks and firm risk (proxied by cost of equity (COE)) varies with market expectations of climate risk materiality. Using S&P 500 firms’ decisions whether to disclose climate risk in Form 10-K for 2008 to 2016, we find that disclosing firms’ COE is 27 bps lower than nondisclosing firms’ COE. In industries where the market expects climate risk to be material, disclosing firms’ COE is 50 bps lower than nondisclosing firms’, while in industries where the market does not expect climate risk to be material, disclosing firms’ COE is 23 bps lower than nondisclosing firms’. Our results indicate that markets use expectations of climate risk materiality to infer the credibility of managers’ climate risk disclosure decisions. Our research contributes to policy-making on climate risk disclosures in regulatory filings and informs the debate around the costs and benefits of the SEC’s current proposal to enhance climate risk disclosures.

Organizational capital and firm risk – Testing the outside option

We examine organizational capital risk on a micro level by identifying 120,017 quasi-voluntary inventor moves between firms over three decades. Consistent with survey results from Eisfeldt and Papanikolaou (2013), we find that a 10% increase in organizational capital results in a 1.8% greater annual exit of firm inventors. Exit risk is higher 1) where employees are more transferable between firms and 2) among financially constrained firms that cannot compensate valuable employees competitively. Valuations are lower for firms with greater levels of inventor turnover / outflows.