Firm Risk Research Articles

Female CEOs and default risk in listed family firms

PurposeThe purpose of this paper is to examine the effect of female CEO board members on listed family firms’ corporate default risk, integrating upper echelons theory with social role theory and the socio-emotional wealth approach and proxying default risk with the Black–Scholes–Merton model. It also searches for possible differences attributable to the type of female CEO.Design/methodology/approachThis study is applied to a longitudinal sample of listed US family firms. After a preliminary analysis of the main descriptive, several models are estimated with the system GMM estimator, which is a panel data estimator. The models are dynamic, including the lagged value of the dependent variable. In addition, the model estimation is repeated with a different measure of default risk, for robustness.FindingsThis research findings show that default risk diminishes in the presence of a female CEO, whose reduction is even greater if she is a family member. The results are proven to be robust to the measure for proxying default risk.Originality/valueThis study primarily contributes to the existing literature by exploring a possible link between female CEOs, particularly those with a family affiliation, and a lower level of default risk in family firms. It also provides practical implications for policymakers, who would be advised to promote conditions enabling women to contribute towards family business viability. In addition, this study offers encouragement for family business owners to value the potential of their female family members in company succession processes.

Role of corporate sustainability disclosures in moderating the impact of country-level uncertainties on tourism sector firms’ risk

The study investigates the role of corporate sustainability disclosures in moderating the link between country-level uncertainties (economic policy uncertainty, political uncertainty and uncertainty due to climate change) and firms’ risks (total risk, market risk, and default risk) in the worldwide tourism firms. We consider the volume of ESG (environmental, social and governance) activities disclosures by the firms as a proxy of corporate sustainability disclosures. The study also explores the link between sustainability disclosures and firms’ risks to validate the risk-reduction hypothesis. The study further highlights the relevance of country-level uncertainties in increasing firms’ risks. The findings indicate that corporate sustainability disclosures can assist in mitigating tourism firms’ risks during periods of heightened country-level uncertainties. The study also documents the significance of sustainability disclosures in reducing the effect of uncertainties on tourism firms’ risks during the COVID-19 period. The results validate the risk-reduction hypothesis indicating that firms’ engagement in corporate sustainability practices facilitates risk mitigation efforts during periods of escalated external uncertainties. By demonstrating that firms that engage in sustainability practices and provide required disclosures are better equipped to manage risks during periods of increased uncertainty, the study provides valuable insights for industry stakeholders, including investors, policymakers, and firms themselves.

Corporate Tax Avoidance and the Cost of Debt Capital of Listed Manufacturing Companies in Nigeria

Purpose: The study “Tax Avoidance and Cost of Debt Capital in Nigerian Manufacturing Companies” is empirical research that investigates the relationship between tax avoidance and cost of debt capital in Nigerian manufacturing companies.Design/Methodology: The study uses a quantitative research design, which involves the collection of numerical data to test hypotheses. Specifically, the study uses a correlational design to establish the relationship between tax avoidance and cost of debt capital in Nigerian manufacturing companies. The study uses a purposive sampling technique to select 42 Nigerian manufacturing companies listed on the Nigerian Stock Exchange. The study collected secondary data from the annual reports and financial statements of the selected companies for the period 2011–2020.Findings: The results of the empirical analysis include the fact that the cost of debt capital was found to have a strong and positive link with tax avoidance. As a result, tax avoidance is regarded as a symptom of rising information risk in Nigerian manufacturing firms, prompting investors to demand a high rate of return. Total accruals also showed a positive and significant relationship between tax avoidance and cost of debt.Practical Implications: The findings of the study indicate that policymakers may need to implement measures to improve tax enforcement and increase transparency in financial reporting. This could involve increasing resources for tax authorities, strengthening legal frameworks for tax compliance, and promoting better corporate governance practices among companies.

Psychopathy, prospect theory, and the Madoff Curve: a dual behavioral neuroscience and behavioral economic framework for understanding White Collar Crime

Reckless behavior by business leaders can be a systemic risk for individual firms and the economies in which the firms exist. We propose that a synthesis of behavioral economics, in particular prospect theory, and the study of psychopathy may help researchers better understand why some business leaders engage in high-risk criminal activity. We propose that psychopathy is associated with an abnormal response to negative consequences. Where traditional Prospect Theory proposes that people are loss avoidant, we propose that people high on the trait of psychopathy may be more motivated by gains and will be risk seeking in high reward/high risk situations for which most people will avoid risk. We propose two empirical study designs that may be used to test the framework in the future.

The Role of Non-Managerial Inside Debt in Firm Risk and the Cost of Debt

ABSTRACT This study investigates the impact of non-managerial inside debt on managerial risk-taking decisions and the cost of debt. We propose a theoretical model demonstrating that non-managerial inside debt can reduce firm risk by influencing managers’ risk-taking decisions and that non-managerial inside debt is inversely related to the firm’s cost of debt. From the proposed model, we develop an empirical hypothesis that indicates the negative relationship between non-managerial inside debt and the cost of debt. We test the hypothesis empirically and find evidence to support the model. The paper adds a novel theoretical model to the literature that shows the significance of non-managerial inside debt in firm risk-taking and capital raising.

Do derivatives benefit shareholders? Evidence from India

We show that for a sample of 1,882 publicly listed Indian firms and sample period from 2016 to 2021, derivative-usage significantly reduces the idiosyncratic stock return volatility. The negative effect of derivative-usage on idiosyncratic volatility is more pronounced for firms with poor information environment, and financially-constrained and distressed firms. The quality of corporate governance does not influence the relationship between derivative-usage and firm risk. The valuation of derivative-user firms is significantly higher than that of non-derivative-user firms. Overall, using derivatives benefits the firms using them, both in terms of reducing risk and creating value for the shareholders.

Does corporate sustainability mitigate firm risk? An empirical analysis on S&P 500 controversial companies

PurposeThis study aims to explore the impact of controversial firms’ corporate sustainability assessments on their risk exposure according to the environmental, social and governance (ESG) paradigm.Design/methodology/approachThis study conducts a cross-sectional study using the ordinary least squares approach to test how corporate social responsibility practices affect firms’ risk exposure, testing the three single impacts of ESG components and the impact of an overall ESG assessment. This study considers the largest Standard & Poor’s (S&P) 500 stock market index companies and focus on a double-risk measurement – systematic and idiosyncratic – developing an empirical study on 132 controversial companies listed on the S&P index.FindingsEmpirical findings indicate that the overall ESG assessment and the environmental and social sub-dimensions decrease idiosyncratic firm risk. At the same time, no significant results are found according to the systematic risk component.Originality/valueThis study fits into the domain of risk management research, investigating whether additional and non-financial disclosures regarding sustainability issues decrease information asymmetries, improving investors’ decision-making and stakeholders’ relations. Prior literature has shown limited evidence on the relationship between corporate social performance (CSP) and firm risk based on controversial companies. The main contribution is to consider the controversy as an independent factor from the industry sector, given that the implications of CSP actions and practices are mainly firm-specific.

The Role of Common Risk in the Effectiveness of Explicit Relative Performance Evaluation

I examine the effect of relative performance evaluation (RPE) on firm performance and risk-taking behavior. Agency theory suggests that, for firms that experience common shocks, RPE in executive compensation plans improves risk sharing and strengthens incentive alignment by providing more information about managerial effort than firm performance alone. In practice (i.e., in the presence of a finite number of peers), RPE effectiveness depends on the extent of firms’ common risk exposure and the amount of common risk captured by RPE peers. I develop a simple model that predicts that the benefit of using RPE exceeds the cost of adding noise from peers when the amount of common risk removed is large. Consistent with predictions, I find empirically that RPE firms perform better than similar non-RPE firms when there is high common risk exposure and the common risk removed by the selected peers is high. I also find that, in these circumstances, the use of RPE is associated with greater firm risk and a lower likelihood of underinvesting. Overall, my study provides evidence that RPE is associated with better risk sharing and stronger incentive alignment when (1) RPE firms are exposed to high common risk and (2) RPE peers are effective in removing common risk for performance evaluation. This paper was accepted by Brian Bushee, accounting. Funding: F. M. Tice gratefully acknowledges financial support from Texas A&M University and the University of Colorado Boulder. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4764 .

코스닥 기업의 ESG 활동이 기업 위험에 미치는 영향

We examined whether ESG practice could reduce firm risk in the Korea KOSDAQ firms during 2012-2022 period. We found that there was a significantly negative relation between ESG practice and firm risk. This negative relation remains intact when we use different measures of firm risk. The results imply that the higher levels of ESG practice can act as channel to reduce firm risk. In addition, as a result of comparative analysis of the risk reduction effect of ESG practice of KOSDAQ firms before and after the outbreak of COVID-19, we found that the risk reduction effect of ESG practice was limited under the crisis. Our results imply that KOSDAQ firms not only can reduce firm risk through ESG investment, but also can somewhat mitigate the negative impact on companies even in crisis. Our results are consistent with previous research that ESG practices can be viewed as a tool to provide non-financial information and reduce information asymmetries.

기술분석보고서 발간이 주가급락위험에 미치는 영향에 대한 연구

We examine whether the technology credit bureau (TCB) analysts’ reports can decrease one-year ahead stock price crash risk for firms listed in the KRX KOSDAQ. The TCB analyst report publication project is a system in which the KOSDAQ entrusts a TCB to publish a report once a year for small and medium-sized neglected firms that do not have security analysts’ research coverage. This study thus contributes to the literature for the following aspects. First, we first examine whether even the involuntary information provision of neglected firms can reduce the firms’ stock price crash risk. Second, we verify whether the system adds value. Overall, the results suggest that TCB analysts’ reports decrease the stock price crash risk and have an effect in line with the policy objective. First, the publication of TCB analysts’ reports significantly decreases the stock price crash risk in probability. Second, we could not find a significant negative relationship between the publication of TCB analysts’ report and negative conditional skewness (NCSKEW) and down-to-up volatility (DUVOL). However, the results appear to be the effect during COVID-19 pandemic. In the sub-sample analysis only with samples before the COVID-19 pandemic, there is a significantly negative relationship between publication of TCB analysts’ reports and NCSKEW. Similarly, the negative effect on DUVOL is found but is marginally significant only in the OLS regression.

Customer concentration and firm risk: The role of outside directors from a major customer

This paper examines the role of customer-affiliated outside directors on suppliers in reducing risk arising from having a major customer. Using a sample of US supplier firms, we find that a positive relationship between having a major customer and supplier risk is weakened with the presence of the major customer's representatives at suppliers' board. We further show that suppliers with customer-affiliated outside directors are more likely to have less conservative financial policies. Our results suggest that customers' board membership at suppliers helps mitigate the business risk due to the tightened supplier–customer relationship and reduced information asymmetry.

Does information disclosure and transparency ranking system prevent the default risk of a firm?

A non-financial information disclosure help prevents the default risk of firms. In addition to this point, the channels through the intermediate transmitting process may influence a firm’s default risk. Therefore, we use the regression method and examine listed companies that traded in the Taiwan stock market from 2005 to 2014. The results show that information disclosure significantly negatively affects default risk. Moreover, information transparency can ultimately impact a firm’s default risk via intermediate transmitting channels after considering endogeneity and checking robustness. Our findings suggest constructing full transparency of the information disclosure system will enhance market operations. Particularly, incorporating the laws into regularized information disclosure will improve efficient management and monitoring in the future.

Economic preferences for risk-taking and financing costs

We hypothesize and empirically establish that economic preferences for risk-taking in different subnational regions affect firm financing costs. We study this hypothesis by hand-matching firms' regions worldwide with the corresponding regional economic risk-taking preferences. We first show that higher regional risk-taking is positively associated with several measures of firm risk and investments. Subsequently, our baseline results show that credit and bond pricing increase when risk-taking preferences increase. For the loan of average size and maturity a one-standard-deviation increase in regional risk-taking increases interest expense by $0.54 million USD. We also find that these results are demand (firm)-driven and stronger for firms with more local shareholders.

Knowledge transmission in the second part of careers: does formal training matter?

PurposeThis paper examines to what extent formal training targeted to workers aged 45 and over could enhance their knowledge transmission activities specifically in changing work environments. This is a key issue for human resources practitioners. Allowing older workers to keep on interacting with their colleagues and transmitting their knowledge acquired through experience reduces the risk for firms of losing critical knowledge assets.Design/methodology/approachThe authors use French-matched employer–employee data to estimate the effect of participation in training sessions intended to support change on the probability for workers aged 45–59 of frequently showing work practices to their co-workers. To account for selection bias in training, the authors reduce the group of untrained workers to those who wanted to attend a training session but had to cancel their participation for exogenous reasons. Leuven and Oosterbeek (2008) show that this is a valid approximation of a random assignment to training.FindingsTraining with the intention to support change for workers aged 45 and more significantly increases knowledge transmission for training participants. This effect is not strictly related to a supervising role as it is significant for workers without subordinates; it holds when the authors address the selection bias in training by narrowing down the comparison group. When training comes as a response to mitigate the potential negative effects of technological or organizational changes in the work environment, it helps workers aged 45–59 maintain their contribution to the knowledge base of the production.Research limitations/implicationsOur findings suggest that two main aspects have to be borne in mind when assessing the effectiveness of training for older workers. First, the reasons for training must be carefully considered, especially if it occurs in response to technological or organizational change in the workplace. Second, the continuation of interactions between older workers and their co-workers must be factored. If the public debate acknowledges that employee learning and development is critical in times of structural change and crisis, the outcomes of knowledge transmission within workplaces in terms of job satisfaction, turnover intentions, productivity or innovation, which the authors do not cover in this paper, deserve further investigations. In particular, the authors believe that studying how the training that supports technological and organizational change influences the relationship between age diversity and firm productivity is a promising avenue for future research.Practical implicationsThe implication of this article for human resource managers is that there may be a substantial cost to not updating the skills of older workers after technological or organizational change. Indeed, it is likely that a large proportion of jobs will only be partially automated, which implies that while some tasks will disappear, rendering the corresponding skills obsolete, others will persist and the skills associated with them will remain useful to organizations. If older workers are excluded from their work collectives after these changes, because their skills have not been updated through training, the knowledge from their accumulated experience that remains valuable will be irrevocably lost when they retire.Originality/valueThis study sheds a new light on the effectiveness of older workers’ training. Some contributions argue that training for older workers is not very effective because it has no significant effect on employment duration, earnings or relative productivity. The authors show that specific types of training to update skills after a technological or organizational change allow older workers to keep interacting with their co-workers and pass on their knowledge gained through experience, thereby reducing the risk for firms of losing critical knowledge assets.

Does explanatory language convey the auditor’s perceived audit risk? A study using a novel big data analysis metric

PurposeThe purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit reports to explain perceived audit risk.Design/methodology/approachThe authors construct the sentiment value, a novel audit risk proxy derived from audit reports, using big data analysis. The relationship between sentiment value and explanatory language is then investigated. The authors present the validity of their new metric by examining the relationship between sentiment value and accounting quality, taking audit fees and hours into account.FindingsThe authors first find that reporting explanatory language is positively related to audit fees. More importantly, the authors provide an evidence that explanatory language in audit reports is indicative of increased audit risk as it is negatively correlated with sentiment value. As a positive (negative) sentimental value means that the audit risk is low (high), the results indicate that auditors describe explanatory language in a negative manner to convey the inherent audit risk and receive higher audit fees from the risky clients. Furthermore, the relationship is strengthened when the explanatory language is more severe, such as reporting the multiple numbers of explanatory language or going-concern opinion. Finally, the sentiment value is correlated with accounting quality, as measured by the absolute value of discretionary accruals.Originality/valueContrary to previous research, the authors’ findings suggest that auditors disclose audit risks of client firms by including explanatory language in audit reports. In addition, the authors demonstrate that their new metric effectively identifies the audit risk outlined qualitatively in audit report. To the best of the authors’ knowledge, this is the first study that establishes a connection between sentiment analysis and audit-related textual data.

IMPACT OF CEO CHARISMA ON FINANCIAL PERFORMANCE: EVIDENCE FROM INDONESIAN FIRMS

Charisma is a personal characteristic of a person that makes others view them as a leader. Some prior studies on CEO charisma and financial performance found a positive relationship between CEO charisma and their firm’s performance, especially during conditions of uncertainty. This study seeks to find the impact of CEO’s charisma on Indonesian firms’ financial performance, using firm risk as the uncertainty condition. This study picked some firms from IDX80 because the firms in that index are believed to have a higher market capitalization and more known by the public, thus giving the possibility of more news coverage. CEO’s charisma is calculated by doing text analysis on articles discussing these CEOs. Firm performance measures used were ROA and Tobin’ s Q. This study used firm risk measured from beta and epsilon of CAPM as a moderating variable to find whether firm risk act as a moderator to increase the effect of CEO’s charisma on firm performance. Panel data regression was used to determine relationship between the variables. This study found a positive and significant relationship between charisma and firm performance when Tobin’s Q was used as a dependent variable and firm-specific risk was included in the regression. However this study found no significant moderating variable by firm risk on the relationship between CEO charisma and firm performance.

The influence of non-controlling major shareholder's exit threat on firm's idiosyncratic risk

Non-controlling major shareholders can effectively restrain controlling shareholders and management by exit threat, so as to participate in corporate governance. Traditional research holds that the exit threat of non-controlling major shareholders can make the company have a more stable development prospect, but it has not paid enough attention to the hidden dangers. Based on 23,243 samples of Shanghai and Shenzhen A-shares from 2010 to 2021, this paper analyzes the influence of non-controlling major shareholder's exit threat on idiosyncratic risk of enterprises. It is found that the exit threat of non-controlling major shareholders will significantly increase the idiosyncratic risk of enterprises. Overall, exit threat lead to increased idiosyncratic risk. This conclusion is still robust after controlling for endogenous problems. The reason why the exit threat amplifies the idiosyncratic risk is that the idiosyncratic volatility is the market's response to the increased uncertainty of the future return rate of individual stocks, while the high exit threat of non-controlling major shareholders of a company exposes the future uncertainty of the company to investors more. This paper reveals that the threat of exit is the key factor affecting the idiosyncratic risk of firms, which has important reference value for regulators and investors.

Do female independent directors reduce corporate risk taking during COVID-19?

ABSTRACT This article examines the impact of female independent directors on corporate risk taking during the COVID-19 pandemic. Our findings suggest that there is a negative relationship between female independent directors and corporate risk taking, indicating that female independent directors can effectively lower risks during this period. In addition, it is reported that the negative impact of female independent directors on firm risks is pronounced in the hospitality industry, as well as in regions with higher confirmed cases of COVID-19. Our results call for greater female independent directors’ recruitment in the boardroom, yielding benefits of lowering firm risks during a crisis.

CEO risk preferences in family firms: Combining socioemotional wealth and gender identity perspectives

Challenging the established notion that women at the top are consistently risk averse, this study combines insights from social identity and socioemotional wealth (SEW) perspectives to propose a novel view of risk preferences by women and men CEOs in family businesses. It reframes risk preferences as behavioral responses by gender and family (managerial) role expectations relative to social aspirations. An empirical test of Italian firms provides support for the hypothesized effects. For firms above social aspirations, women family CEOs take more risk as performance declines than their men family counterparts; this gap in risk preferences attenuates for men/women nonfamily CEOs. For firms below social aspirations, these effects are reversed. This study contributes to research on gender identity and risk-taking in family firms by showing that women and men do not always behave according to gender stereotypes. Rather, due to malleability of gender identity, they enact differing risk behaviors across contexts. In addition, it advances SEW theory by unpacking the effects of distinct SEW dimensions on firm risk by gender identity.

The soft landing: Does intrafamily succession matter for corporate risk-taking?

Succession has been recognized as one key challenge to family firms. To manage succession risks, founders aiming for intrafamily succession might adopt risk-averse strategies in advance. Using a sample of A-share listed family firms in China, we find that family firms with apparent family successors are indeed more risk-averse than those without such successors: the former group has fewer investments in research and development (R&D), lower debt, more cash holdings, and less volatile earnings than the latter. These effects are weaker for firms in a more market-oriented environment, firms with stronger family control, or firms faced with more intense market competition. Further analyses show that the reduced risk-taking for intrafamily succession is stronger when successors have been involved in family businesses. Firms with male successors are also more risk-averse than those with female successors except in R&D investments. By illustrating that founders proactively curb firm risks to increase risk capacity for family successors, this paper not only contributes to the literature on family succession, but also extends the literature about determinants of corporate risk-taking decisions.