Firm Risk Research Articles

ESG Disclosure and the Cost of Capital: Is There a Ratcheting Effect over Time?

In recent years, the CSR disclosure–firm risk relationship has raised the acute interest of capital providers, regulators, debtholders, and academic researchers. In addition to the mounting corporate social responsibility (CSR) disclosure issues, one particular area that has increasingly attracted the attention of academics, practitioners, and policymakers is the dynamic of CSR disclosure. The effects of institutional pressures and the relative nature of reputation have amplified expectations over time, resulting in a dynamic CSR disclosure strategy to meet those expectations. However, studies on the relationship between CSR disclosure and firm risk over time are still in their premature stages. Thus, this paper seeks to contribute to the literature on firm risk and CSR disclosure by examining the effect of ESG disclosure on the cost of capital over time. The study examines a sample of 430 S&P 500 US firms observed over the 2011 to 2019 period. Our results indicate that the three dimensions do not have the same effect. Governance disclosure decreases the cost of capital during the first years, and in later years, the effect becomes positive. Over time, social disclosure increases the cost of capital. However, environmental disclosure shows a negative and significant effect on the cost of capital during the first years but no significant effect later in time. Our results contribute to explaining the dynamic effect of CSR disclosure. A predominant feature to consider is the evolution of CSR disclosure over time. Steadily, US firms are moving away from some CSR disclosure activities to others. However, firms that abandoned some existing CSR disclosure commitments may face aggressive responses from stakeholders. US firms have to be more cautious when linking CSR disclosure to firm risk over time, recognizing the long-term benefits and drawbacks of CSR disclosure.

The Credit Risk of Sustainable Firms during the Pandemic

This study investigates how the credit risk of more sustainability-oriented firms changes when national governments intervene in their economies to counterbalance the COVID-19 pandemic. For this reason, we examine how the credit default swap spread changes on a database of all listed firms—for which a credit default swaps (CDS) contract is available—in Europe and the United Kingdom during the whole year of 2020. We find that when national governments intervene in the local economies, the CDS spreads for these firms decrease more than for other firms. Furthermore, the CDS spread changes are more sensitive to those policies aimed at supporting household and business income during the pandemic rather than those policies related to stay-at-home measures and investments in healthcare. Our results corroborate previous theories linking firm sustainability, equity and credit risk.

R&D investments in response to performance feedback: moderating effects of firm risk profile and business strategy

ABSTRACT R&D investments in response to performance feedback have been extensively studied. We show that both firm risk profile (i.e. low vs high risk) and business strategy (i.e. Prospector vs Defender), two aspects understudied in this context, have incremental moderating effects (both separate and joint) on this R&D-performance feedback relationship. Using a sample of US listed firms from 2000 to 2019, we observe that, when performance relative to aspiration level decreases (increases), without controlling for moderating effects of risk and strategy, firms tend to increase (decrease) R&D investments. However, as risk profile changes from low to high risk, responses to performance feedback tend to change from decreasing R&D or maintaining status quo to increasing R&D investments. We also find that, in response to performance deviation from aspiration level (regardless of the direction), Defenders tend to decrease R&D investments, regardless of risk profile, whereas Prospectors tend to increase R&D investments (maintain status quo) when their performance relative to aspiration level decreases (increases).

Debt maturity structure and stock price crash risk: The case of Turkiye

This study explores the relationship between the debt maturity structure and the stock price crash risk for nonfinancial firms on the Borsa Istanbul from 2009 to 2019. Family ownership is added to the analyses to provide a new perspective on the literature examining the link between stock price crash risk and debt structure. The results show that an increase in long-term debt reduces the risk of a stock price crash, as efficient corporate management practices not only result in favorable debt issuance at a longer term but also reduces information asymmetry that leads to crash risk at firms. Furthermore, the mitigating effect of long-term debt on crash risk is more pronounced at family-controlled firms because active monitoring by family members causes lower agency conflicts in obtaining longer-term debt as well as in maintaining family status, which in turn also diminishes future stock price crashes.

Effects of 10-K readability on institutional blockholder monitoring of risk management

ABSTRACT Using the Plain Writing Act (PWA) of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investors’ monitoring of firm risk management. The results indicate that the negative association between monitoring institutional ownership and systematic risk is stronger when firms provide more readable 10-K reports. The impact of readability improvement on the relation between institutional monitoring and risk is more pronounced after the PWA. This finding confirms our hypothesis that improved readability provides institutional investors with more complete firm information with which to conduct their monitoring efforts, thus inducing more effective risk management.

Board gender diversity and firm risk in UK private firms

This research aims to investigate the effect of board gender diversity on private firm risk. Using a sample of 27,352 UK private firms from 2005 to 2017, we report a negative association between board gender diversity and firm risk. In particular, we find that risk reduction is associated with women owner directors who may have a stronger incentive for better risk management. Firm risk is lower (higher) for boards with local (foreign) women directors suggesting that local market knowledge is more valuable for private firms. Lower director busyness in gender diverse boards is the channel that enables women directors to reduce firm risk by directing more attention to fiduciary responsibilities. Additional analysis reveals that more risky, small to medium-sized firms benefit the most from gender-diverse boards. Our findings are robust to alternate risk measurements and endogeneity corrections.

Influencing Factors Dividend Policy: Empirical Evidence From Different Parts Of The World

From various empirical evidences conducted in various parts of the world on the factors that influence dividend policy, the results show that there are similarities or mutual support between one study and another. However, there are also among the variables that have a relationship with dividend policy showing contradictory results between one study and another. This can happen due to differences in business characteristics, business environment, culture and legal regulations that differ from one country to another. From several studies in various parts of the world, the factors that have the most influence on dividend policy are profitability, firm size, firm age, liquidity, previous dividends, dividend payments, firm value and cash flow. and leverage have a negative relationship with dividend policy, and Firm size, firm risk and ownership structure do not have a direct influence on dividend payments in private banks in Bangladesh.

Influencing Factors Dividend Policy: Empirical Evidence From Different Parts Of The World

From various empirical evidences conducted in various parts of the world on the factors that influence dividend policy, the results show that there are similarities or mutual support between one study and another. However, there are also among the variables that have a relationship with dividend policy showing contradictory results between one study and another. This can happen due to differences in business characteristics, business environment, culture and legal regulations that differ from one country to another. From several studies in various parts of the world, the factors that have the most influence on dividend policy are profitability, firm size, firm age, liquidity, previous dividends, dividend payments, firm value and cash flow. and leverage have a negative relationship with dividend policy, and Firm size, firm risk and ownership structure do not have a direct influence on dividend payments in private banks in Bangladesh.

Low-carbon city initiatives and analyst behaviour: A quasi-natural experiment

This paper investigates how environmental regulation and action affect analyst behaviour. Exploiting staggered enactment of low carbon city (LCC) initiatives in a difference-in-differences (DiD) setting, we observe that analyst forecast accuracy (dispersion) is significantly lower (greater) for client firms headquartered in cities covered by the LCC pilot programme, especially among firms with a low-quality information environment. The LCC effort affects analyst behaviour via increased firm risk and reduced earnings predictability, causing enhanced site visits and coverage. The results are stronger in cities with more rigorous enforcement and regulation intensity, for private firms with high business complexity and in heavily polluting industries. Results are robust to DiD models with entropy balancing matching, placebo tests, parallel trend tests, and a battery of fixed effects. Collectively, they reveal that environmental regulation has real impacts on analyst forecast behaviour.

Political Promotion Incentives and Firm Risk: Evidence from State-owned Enterprises in China

ABSTRACT Top executives in state-owned enterprises (SOEs) in China can be promoted to government sectors. This is regarded as political promotion. Using hand-collected turnover data for top executives in SOEs and adopting a time-varying difference-in-differences design, we find that firm risk is significantly lower in the years immediately before the political promotion of top executives, when their incentives for political promotions are stronger. Moreover, strong industry tournament incentives counteract the impact of political promotion incentives on firm risk. This study supplements tournament theory and enhances our understanding of how different incentive mechanisms interact and affect firms’ choices vis-à-vis their risk-taking activities.

Risk along the supply chain: Geographic proximity and corporate risk taking

This study investigates the effect of supplier-customer geographic proximity on corporate risk taking. We find strong evidence that supplier-customer geographic proximity reduces supplier firms risk taking. To establish causality, we investigate plausibly exogenous variation in geographic proximity caused by new built high-speed railway connections between suppliers and their customers in China. The negative effect of supplier-customer geographic proximity on suppliers’ risk taking is more prominent when the suppliers have lower bargaining power and higher information asymmetry. These findings imply that the monitoring and information sharing are possible underlying channels, through which supplier-customer geographic proximity influences suppliers risk taking.

Women’s Presence on Corporate Boards: Addressing Director Selection, Participation, and Gender Bias

Gender diversity of corporate boards is gaining attention as a global issue, but women’s presence on boards remains low despite increased numbers of qualified women. Most research compares gender diversity of boards and firm performance or corporate social responsibility compliance and reporting, ethics compliance, or other decisions impacting firm risk and success. Despite positive outcomes associated with gender diverse boards, few women directors are appointed, and progress is slow. Quotas and incentives have been considered and implemented in several countries to develop board gender diversity, but without enforced quotas, minimal change is seen. When women are appointed, they are often not present in sufficient number to impact board gender diversity. A direct focus on gender bias in director selection and board member participation is needed to provide a deeper understanding of women’s presence on boards.

Board Characteristics and the Insolvency Risk of Non-Financial Firms

How do board characteristics influence the risk of bankruptcy? We study this question by estimating classic Z-Score models using panel data comprising 2519 listed non-financial firms from 29 European countries over the 2012–2020 period. We found that board independence is associated with lower risk of bankruptcy. In contrast, employee representatives have an adverse effect on board monitoring capacity and are predicted to increase bankruptcy risk. The presence of female directors and foreign directors on board—two indicators of board diversity—reduce bankruptcy risk. While board independence and diversity decrease bankruptcy risk in financially non-distressed firms, they have the opposite effect in financially distressed firms. These findings are statistically and economically significant and hold, at least in part, under alternative specifications. Our findings demonstrate the need for governance regulators, credit rating agencies, financial institutions, firms and investors to lend more weight to board composition, especially under the conditions of impending financial distress.

Zombie Firms during and after Crisis

The phenomenon of zombie firms is gaining the attention of economists across different countries of the world; the increased interest is particularly evident after periods of economic crises. In our study, we focus on the development of zombie firms in the period before and after the 2008 crisis within two different economies, i.e., Germany and the Czech Republic, to provide insight into how different conditions and the overall economic context affect the fact that companies are more prone to becoming zombie firms. We implemented a difference-in-differences regression model to estimate the treatment effect by comparing the change (difference) in the differences in observed outcomes between these two countries. The data were obtained from two databases—the database Albertina by Bisnode a.s. providing financial statements of enterprises in the Czech Republic, and the database provided by Creditreform AG, which includes annual report data for a large sample of German companies. The dataset of German enterprises included 1,444,698 observations, i.e., 338,923 firms, and the dataset of Czech enterprises included 2,139,462 observations, i.e., 523,542 firms, both across the years 2000–2016, i.e., the data sample covered the period before and after the 2008 crisis. The different development of the share of zombie firms after the great financial crisis between Germany and the Czech Republic was proven as statistically significant. The findings confirm Germany is a country with a more stable economy and with a significantly lower risk of zombie firms’ persistence, while the Czech Republic is at the level of the European average in terms of zombie share. The results also suggest an influence of post-crisis monetary policy on companies and the possible link between low interest rates and a growing share of zombies.

The Relationship between Innovation Capital, Firm Value, and Firm Risk

The purpose of this study is to examine two relationships: (1) innovation capital and firm value; and (2) innovation capital and firm risk. The population of this study was all companies listed on the Indonesia Stock Exchange from 2016-2020, and the required research sample was drawn using a purposive sampling technique. Data analysis technique used multiple linear regression. The result revealed that innovation capital had a positive and statistically significant effect on firm value, but innovation capital had a negative and insignificant relationship on firm risk. Based on the analysis, it can be concluded that innovation capital has a potential factor to increase company's value, only if companies have a competitive advantage by disclosing the R&D costs and investments in their financial statements. Because of each company is unique, innovation capital is not always related to a systematic risk measurement.

What makes firms vulnerable to the Russia–Ukraine crisis?

PurposeThis study examines the impact of the Russia–Ukraine war on the constituent firms of the leading stock market indices of the G7 countries to provide insights into the vulnerability of firms to war events.Design/methodology/approachThis study employs the event study method on a sample of 531 firms covering the period from 02 March 2021 to 08 March 2022 and conducts a cross-sectional analysis of cumulative abnormal returns and country- and firm-specific variables.FindingsRisk exposure and trade dependence trigger invasion-generated negative abnormal returns. The authors demonstrate that stock prices are fragile to geopolitical risks and trade dependence. Consistent with previous literature, the authors find evidence of a size anomaly and high risk associated with a higher book-to-market ratio.Research limitations/implicationsThis study has implications for policymakers identifying the firm-specific variables driving event-induced returns. While providing insights into the geographical diversification of funds, this study shows the heterogeneous characteristics of firms operating in these countries.Originality/valuePrevious studies on the Russia–Ukraine war have been limited to analyzing the behavior of leading stock market indices without examining firm-level variations triggered by the war. This study fills this gap and contributes to the growing literature on the Russia–Ukraine crisis in two ways: first, it provides firm-level evidence from the G7 countries in addition to how global stock market indices have reacted to the invasion and second, it uses cross-sectional analysis to provide evidence of the characteristics that make firms resilient to wars.HighlightsWe are the first to report firm-level evidence of the Russia–Ukraine war effectsFirms in France and the United States are unaffectedStock prices are fragile to geopolitical risks and considerable dependence on tradeHigher book-to-market exposes the firms to the risk of exogenous shocksSmaller firms outperform large firms in the G7 stock markets

The effect of tax avoidance and tax risk on frm risk

This study aims to determine whether tax avoidance and tax risk have an influence on firm risk. This study uses data in the form of annual financial statements of manufacturing companies listed on the Indonesia Stock Exchange (IDX) from 2014 to 2018. The results of this study show that tax avoidance and tax risk have a positive effect on firm risk. The results of this study prove the signaling theory that company management sends signals in the form of information about tax avoidance and tax risk to investors. The investors then use the information as a tool in making decisions in the future.

Understanding short‐term price pressure from index reconstitutions: Evidence from the CSI 300

AbstractMotivated by the mixed results of the few prior studies, we focus on the short‐term price performance of stocks added to or deleted from the CSI 300 Index. Consistent with the price pressure hypothesis, we evidence a temporary change in the prices of respective added and deleted stocks, followed by subsequent price reversions. To reconcile past studies, we also test several explanatory factors as potential sources of short‐term price pressure. Results show that changes in investor trading behaviour, investor awareness, firm risk, and liquidity explain the short‐term price pressure of added and deleted stocks, while changes in institutional trading, realised volatility, and liquidity explain the differences in the impact of reconstitutions between added and deleted stocks.

Efficiency and Book-to-Market Ratios of U.S. Pharmaceutical Firms

Using data envelopment analysis (DEA), we calculate sales efficiency for U.S. pharmaceutical firms and find it to be positively associated with those firms’ book-to-market ratios (a measure widely used in the finance literature to estimate the risk and growth potential of firms’ common stock). Thus, we conclude that sales-efficient firms in this industry are, on average, undervalued and suggest that the U.S. pharmaceutical industry is characterized by firms making off-balance sheet investments, which we argue leads to efficiency during our sample years (2009-2015). We also conduct longitudinal analyses and conclude that firms in our sample with smaller asset levels are more efficient. Finally, we conduct a slack analysis, which concludes that most of the overvalued companies exhibit inefficiencies in their utilization of research and development costs and selling, general, and administrative costs. Fewer of those firms exhibit inefficient utilization of their costs of goods sold.

Ownership concentration and firm risk: The moderating role of mid‐sized blockholders

AbstractThis study analyzes the relationship between mid‐sized blockholders and firm risk. We show that ownership structure matters for firm risk beyond the first largest blockholder. Firms with multiple blockholders take more risk than firms with just one blockholder, even when controlling for the stake of the largest blockholder. Consistent with the diversification argument, we find that firm risk increases by 22% when the number of blockholders increases from one to two. Our results are robust to controlling for blockholder type and firm characteristics. We carry out various robustness checks to tackle endogeneity issues. More generally, we provide evidence that firms’ decisions are affected by mid‐sized blockholders and not merely the largest blockholder. This is in line with theoretical predictions.