Firm Risk Research Articles

Intellectual property protection and firm risk: How service transition and knowledge intensity mitigate the loss of strategic resources

The inherent rarity and inimitability of intellectual property (IP) has long been recognized as the foundation of its strategic value. These characteristics are compromised in markets with weak IP protection, where IP cannot be leveraged to create sustainable competitive advantage. This presents significant challenges for internationalization, and extant literature provides little guidance on how firms can mitigate this risk. From first principles of resource-based theory, we posit that service transition alleviates this loss of a strategic resource, representing a basis for reliable revenue generation that retains its rarity and inimitability across markets with varying levels of regulatory protection. Combining novel datasets on firms’ foreign market activity and countries’ IP rights, we find that IP risk increases the volatility of revenues and consequently firm idiosyncratic risk, but that this can be offset by (a) deriving a larger share of revenues from service-based business segments and (b) increasing the knowledge intensity of service offerings. Results from a 12-year panel of 2,716 firms across 223 industries offer new insights into how the regulatory environment can erode the strategic value of resources and practical recommendations to mitigate the detrimental effects on firm-specific risk and market performance.

RESEARCH STATUS AND PROSPECTS OF SHARIAH COMPLIANCE IMPACT ON FIRM RISK, PERFORMANCE AND RESILIENCE

This article performs a bibliometric analysis on the impacts of Shariah compliance on firms’ risk, performance, and resilience. Using Scopus database, a total of 1063 documents have been identified and analyzed utilizing VOSviewer. In the analysis, we evaluate co-authorship, keyword co-occurrence, and citation to identify influential authors, countries, and sources. The findings reveal a consistent increase in publications, particularly noticeable from 2014 onwards, indicating a growing interest in this research domain. Notably, the study highlights the pivotal role of Shariah compliance in enhancing corporate governance, financial risk management, and sustainable development, thus directly impacting the risk, performance, and resilience of firms. Globally it seems that by adhering to Shariah principles, firms can mitigate risks effectively, enhance their performance, and strengthen their capacity to withstand market fluctuations and economic uncertainties, thereby improving their overall resilience. These findings underscore the global significance of Shariah-compliant finance and emphasize the imperative for further research to deepen the understanding of its implications for firms.

Impact of ESG performance on financial risk in energy firms: evidence from developing countries

Purpose This study aims to examine the impact of ESG performance on financial risk (FR) in energy firms from developing countries. It also explores the moderating roles of ESG controversies and board gender diversity (BGD) on this relationship. Design/methodology/approach The research uses a panel data set of 218 energy firms from 20 developing countries from 2019 to 2024, using two-stage least squares regression to address potential endogeneity. Robustness checks are conducted using fixed-effects estimation and pooled ordinary least squares. Findings The results indicate that superior ESG performance significantly reduces both total and systemic risk. ESG controversies positively moderate the relationship between ESG performance and FR, suggesting that controversies may weaken the risk-reducing benefits of strong ESG practices. Additionally, BGD significantly strengthens the negative relationship between ESG performance and FR. Robustness checks confirm the consistency of these findings across different estimation methods. Originality/value This study contributes to the growing body of literature by examining the role of ESG performance in FR mitigation, specifically within the energy sector in developing countries. To the best of the authors’ knowledge, this is the first research to explore these dynamics in this specific context. This study uniquely illustrates how ESG controversies and BGD significantly moderate the ESG–risk relationship, offering fresh insights that extend stakeholder, risk management and legitimacy theories. The findings highlight the importance of integrating ESG factors into corporate governance and risk management, particularly for firms operating in high-risk, high-impact industries such as energy.

Pension Risk and the Sustainable Cost of Capital

Prior research empirically finds that the systematic equity risk for US firms as measured by beta reflects the risk of their defined benefit pension plans, despite opaque and complicated pension accounting rules. This paper re-examines this question in the context of subsequent clarification of these rules, and the growing importance of non-defined benefit pension funds. This issue is examined by comparing standard equity-based models with a broader pre-existing shareholder model of the reporting entity to re-examine the relationship between firm equity risk and pension plan risk. The empirical tests are conducted on a sample of S&P 500 firms during the first three years of the introduction of the revised pension accounting rules (2006–2008), based on panel data regression relating firm risk to pension risk and controlling for other variables. In contrast to the prior findings of JMB, the estimated cost of capital is additionally sensitive to the following: (a) alternative explicit versus implicit definitions of pension liability; (b) the nature and scope of long-term deferred compensation arrangements; and (c) the scope and nature of investment-related risks through investment in sponsoring company stock that are associated with these pension arrangements.

How Greenwashing Affects Firm Risk: An International Perspective

The effects of greenwashing as a corporate strategy on firm risk are not well defined. I construct a greenwashing measure for 3973 companies from 70 countries from 2012 to 2022. Using Dynamic Panel Modeling, I find results suggesting that greenwashing is a complex phenomenon with both positive and negative consequences. While it can improve a firm’s public image and potentially enhance its financial performance, it may also lead to increased risk and misallocation of resources. Greenwashing firms have a lower weighted average cost of capital due to a higher debt-to-capital ratio. They are larger, have higher institutional ownership, and lower dividend yields. On the other hand, greenwashing firms have more ESG-related controversies that can hurt firm revenues and market value, they have higher unsystematic risk, and they have lower dividend yields and return on equity. I also find evidence that there is a feedback relationship between ESG ratings and greenwashing. There is no evidence that government mandates on ESG reporting inhibit greenwashing. The implication is that ESG scoring that emphasizes reporting ESG activities while informing investors also encourages greenwashing.

Supplier Carbon Management and Firm Idiosyncratic Risk: Empirical Evidence From China

ABSTRACTAlthough existing research emphasizes the importance of internal carbon management (CM) in influencing firm risk, the impact of external stakeholder CM on firm risk remains unclear. This study employs signaling theory to explore how supplier CM affects firm idiosyncratic risk (IR), alongside the moderating roles of the supply chain information environment and the criticality of firm–supplier relationships. The findings of this study demonstrate that supplier CM can reduce firm IR. The risk reduction effect is strong when the information environment between a firm and its suppliers is rich and when the dependency between the firm and its supplier is strong. Path analysis reveals that supplier CM primarily reduces firm IR by alleviating information asymmetry. Moreover, the risk reduction effect increases for firms with small sizes. This research extends the application of signaling theory to supply chain research and bridges the gap between the CM and firm IR literature within the context of supply chain management.

Managerial interlocking networks and firm risk spillover: evidence from China

PurposeThis paper examines the effect of managerial interlocking networks (MINs) on firm risk spillover by using a sample of Chinese A-share listed firms.Design/methodology/approachApplying the complex network approach, we build managerial interlocking networks (MINs) and leverage degree centrality to quantify a manager’s network position. To gauge firm risk spillover, we utilize the conditional autoregressive value at risk (CAViaR) model to compute the value-at-risk. Subsequently, we employ ordinary least squares to investigate the influence of MINs on firm risk spillover.FindingsOur research uncovers a direct correlation between a firm risk spillover and the status of network positions within managerial interlocking networks; namely, the more central the position, the greater the risk spillover. This increase is believed to be due to central firms in MINs having greater connectedness and influence. This fosters a similarity in decision-making across different firms through interfirm managerial communication, thus amplifying the risk spillover. Economic policy uncertainty (EPU) and Guanxi culture furtherly intensify the effects of MINs. Additional analysis reveals that the impact of MINs on the firm risk spillover is significantly noticeable in non-state-owned enterprises, while good corporate governance diminishes the risk spillover prompted by MINs.Originality/valueOur findings offer fresh insights into the interfirm risk outcome associated with MINs and extend practical guidelines for attenuating firm risk spillover with a view toward mitigating systemic risk.

Can Catering to Local Area Needs Through CSR Reduce Firm Risk?

ABSTRACTThis paper examines the effect of corporate social responsibility (CSR) spending to cater to the local area's needs (the area of business operations) in reducing the firm's risk in the mandatory CSR setting. Using a sample of 1677 Indian firms spanning the financial year 2009–2022, we present several interesting results. First, we demonstrate that the risk of the firms eligible under mandatory CSR law is higher than those not qualifying. Second, we find that the risk of firms that focus their CSR on the local area's needs is lower. In an additional analysis, we demonstrate that firms with higher spending on the local area experience lower contingent liability, legal expenses, and audit fees. We illustrate that focusing on the local area's needs in CSR efforts retains signaling value under a mandatory CSR regime.

Impact of Debt Composition and Accounting Conservatism on Financial Distress in Emerging Markets

Aims: This study investigates the impact of debt composition, specifically short-term and long-term debt, on corporate financial distress, focusing on the moderating role of accounting conservatism. It aims to understand how firms in emerging markets, particularly Kenya, can achieve financial stability through prudent debt structuring and conservative accounting practices. Study Design: The research adopted an explanatory research design. Place and Duration of Study: The study utilized financial data from firms listed on the Kenyan Securities Exchange between 2008 and 2021. Methodology: The study analyzed a sample of 45 firms trading at the Nairobi Stock Exchange over 14 years from 2008 to 2021. The study used panel logistic regression, a statistical method for analyzing data with multiple observations over time, to test its hypotheses. Results: The results show that both short-term and long-term debt increase the likelihood of financial distress, with accounting conservatism further intensifying the risk for firms heavily reliant on short-term debt while mitigating it for those with long-term debt. This suggests that conservative accounting practices, which promote early recognition of losses, may exacerbate financial distress for firms heavily reliant on short-term debt. In contrast, for long-term debt, accounting conservatism has a mitigating effect helping firms manage their debt obligations more effectively over time. This highlights a nuanced role of accounting conservatism, where it increases the pressure on firms with short-term debt while providing stability for those with long-term obligations. Conclusion: The findings suggest that corporate managers in emerging markets should carefully balance short- and long-term debt to minimize financial distress risks. Additionally, adopting conservative accounting practices can serve as a safeguard, providing early warning signals for financial trouble and enhancing corporate stability. Managers should therefore carefully balance short-term and long-term debt to reduce financial distress while adopting conservative accounting practices to enhance financial transparency and risk management. Policymakers can support firms by promoting responsible debt management and offering incentives for conservative financial reporting to strengthen overall financial stability.

Estimating the impact of supply chain network contagion on financial stability

Realistic credit risk assessment, the estimation of losses due to a debtors failure, is central for maintaining financial stability. Credit risk models focus on the financial conditions of borrowers and only marginally consider other risks from the real economy, supply chains in particular. Recent pandemics, geopolitical instabilities, and natural disasters demonstrated that supply chain shocks can contribute to financial losses large enough to threaten financial stability. Based on a unique nation-wide micro-dataset, containing practically all supply chain relations of all Hungarian firms, together with their bank loans, we develop a multi-layer shock propagation framework to estimate how economic shocks to firms cascade in the supply chain network (SCN), leading to additional financial losses to firms, additional defaults of loans and, hence, losses to banks’ equity buffers. First, we estimate the financial systemic risk of individual firms, by quantifying the expected financial losses caused by a firm’s own- and all the secondary defaulting loans caused by supply chain network contagion. We find a small fraction of firms carrying substantial financial systemic risk, affecting up to 22% of the banking system’s overall equity (assuming a loss given default of 100%). These losses are predominantly caused by SCN-contagion. Second, we calculate for every bank the expected loss (EL), value at risk (VaR) and expected shortfall (ES), with and without SCN-contagion. We find that SCN-contagion amplifies EL, VaR, and ES by a factor of 5.2, 6.7 and 4.4, respectively. Third, we showcase how the new framework can be used to assess the risks of a large real economy shock for financial stability. We simulate the financial losses from a COVID-19 inspired shock calibrated from firm-level employment data in the beginning of 2020. Our simulations show that without any interventions, system-wide bank equity would suffer losses of 6%. The framework can be used to design and test targeted policy interventions, e.g., optimally providing firms with enough liquidity-support to avert their default. By supporting selected illiquid (yet solvent) firms with additional liquidity totalling 0.5% of overall bank equity, the losses can be reduced from 6% to 1% of overall bank equity. These findings indicate that for a more complete picture of financial stability and realistic credit risk assessment, SCN contagion needs to be considered. This now quantifiable contagion channel is of relevance for future systemic risk assessments of regulators.

Impact of economic policy uncertainty on systemic risk of real enterprises: Evidence from China

This work examines the impact of economic policy uncertainty on the systemic risk of Chinese real firms from the perspectives of financing constraints and external guarantees. The findings suggest that economic policy uncertainty significantly enhances the systemic risk of real firms. The mechanism test shows that economic policy uncertainty will enhance the level of systemic risk of enterprises by exacerbating their financing constraints and expanding the scale of external guarantees. Heterogeneity analysis shows that the negative impact of economic policy uncertainty on systemic risk is more obvious in enterprises with investment and financing maturity mismatches and poorer corporate governance.

Enterprise value and risk taking in the banking industry: Cooperatives vs. corporations

This study leverages on a quasi-natural experiment to shed light on the relative merit of the cooperative versus the corporate form. In Italy, a new law forced some cooperative banks to turn into joint stocks banks. This change of ownership structure proves to be Pareto improving for all financial claimholders since it either increases or leaves the value of equity and debt of any seniority unchanged, while reducing the market-based metrics of risks. This evidence challenges the view that the demutualization increases the asset substitution risk, transferring wealth from bondholders to shareholders and heightening the firm risk profile. Therefore, a transition from a cooperative to a corporate form should not cause stability concerns in the banking industry.

From Financialization to Sustainability: The Impact of Climate Risks on Shadow Banking Activities in Non-Financial Firms in China

Climate risks are increasingly shaping corporate strategies, raising important considerations for sustainability. This study explores the impact of climate risks on the shadow banking activities of non-financial firms, examining how these risks influence sustainable financial practices. Analyzing a sample of Chinese listed firms from 2010 to 2022, this study finds that climate risks are negatively associated with shadow banking activities, reflecting a shift towards more sustainable financial management. This finding remains robust through various robustness checks and tests for endogeneity. Heterogeneity results indicate that the reduction in shadow activities due to climate risks is more pronounced in firms with higher dependence on external financing and weaker profitability. Mechanism results suggest that climate risks amplify cross-sectional risks for firms, increasing risk sources. Simultaneously, companies enhance their preference for holding cash to address potential risks. The combined effect of these factors leads to a decrease in shadow banking activities among non-financial firms, aligning with a shift towards sustainability. This study provides new insights into understanding how climate risks drive sustainable financial decision-making and enriches the research on the determinants of firm financialization.

Intergroup Biases in Assessing Political Risk: The Role of National Identity

Geopolitics are back as a subject of inquiry in international business and have increased the threat of political risk for MNEs and domestic firms globally. However, firms may struggle to assess political risk accurately due to the social identity processes within top management teams that influence information seeking and processing. This article offers a brief introduction to an intergroup bias which can harm political risk assessments, namely managers filtering risk through a national identity lens. Focusing on the consequences of identity bias, we suggest ways in which political risk assessment may be made more effective for managers – and accurate.

Waves or ripples: African countries risk shocks and the survival of Chinese exports to Africa

This paper examines the impact of risk shocks in Africa on the stability of Chinese firms' export relationships by analyzing risk fluctuations and using survival analysis to measure their effect. The findings reveal that risk shocks significantly increase the survival risk of Chinese firms' export relationships, leading to a notable reduction in stability. Private and non-foreign firms are more vulnerable to these risks, but certain market strategies such as learning-by-doing, learning from neighboring firms, and waiting strategies can effectively mitigate their adverse effects on export stability. Our findings indicate that certain market strategies, such as learning-by-doing, learning from neighboring firms, and waiting strategies, can effectively mitigate the adverse effects of risk shocks on export stability. Interestingly, a nonlinear marginal effect is observed in the case of the waiting-timing strategy. However, adopting a multi-destination strategy tends to worsen the negative impact of risk shocks on export stability, especially for private firms. Furthermore, non-market strategies employed by firms that promote government diplomatic behavior help reduce this negative impact.

Corporate governance, firm risk and firm performance: the moderating role of group affiliation

Corporate governance, firm risk and firm performance: the moderating role of group affiliation

Corporate Governance and Firm Risk: Earnings Management as Moderating Variable

Corporate Governance and Firm Risk: Earnings Management as Moderating Variable

ESG risk, economic policy uncertainty, and the downside risk: Evidence from US firms

This study investigates the relationship between risk factors of Environmental, Social, and Governance (ESG) and the downside risk of U.S. firms and tackles the role of economic policy uncertainty (EPU) in this relationship. Our results show that the downside risk of firms, as measured by value-at-risk and lower partial moment, is positively affected by ESG risk scores, and that this effect becomes more pronounced as EPU rises. These results are robust to two other alternative measures of ESG risk. We argue that enhancing ESG management and adaptability to economic uncertainty is crucial for aligning with sustainable development goals. Our findings provide valuable insights for U.S. firms, investors, and policymakers looking to navigate the evolving risk landscape.

Bankruptcy spillovers and stock price crash risk of non-bankrupt firms

This paper examines whether corporate bankruptcies affect non-bankrupt firms' stock price crash risk. We observe that an upsurge in corporate bankruptcies adversely affects the crash risk of non-bankrupt firms in the industry. The increase in the crash risk following bankruptcy clustering in an industry is greater in financially constrained and financially distressed non-bankrupt firms. We also find that the creditor-in-control bankruptcy regime moderates the adverse effects of bankruptcy spillovers on the crash risk of non-bankrupt firms. Our results are robust to endogeneity tests (using GMM estimators) and tests that exclude industry downturns and macroeconomic shocks.

Risk disclosure, earnings smoothing and firm perceived risk

Purpose This paper aims to examine the association between perceived firm risk and two reporting mechanisms: risk disclosure and earnings smoothing in the UK context. Design/methodology/approach This study juxtaposes three competing views, the “null”, the “divergence” and the “convergence” hypotheses, and empirically investigates whether risk disclosure and earnings smoothing affect firm perceived risk for a sample of large UK firms with rich and poor information environments. This study also uses the global financial crisis as an external shock on overall risk in the economy to investigate when and how managers use these two reporting mechanisms to shape the firm perceived risk. Findings This paper documents that risk disclosures have no significant effect on investors’ risk perceptions, consistent with risk disclosures containing boilerplate and generic statements about firm risk. This paper also finds that earnings smoothing reduces investors’ risk perceptions, reflecting investors’ interpretations about future firm performance. Additional tests reveal that earnings smoothing is not associated with perceived firm risk for firms with rich information environments and expanded risk disclosures. Furthermore, reporting smooth earnings decreases perceived firm risk following the global financial crisis. These findings are robust to alternative specifications and measures of earnings smoothing as well as post-filing perceived firm risk. Research limitations/implications This study does not distinguish between the garbling role and the informational role of earnings smoothing. The risk disclosure measurement used in this study, developed based on UK annual reports, may limit the generalizability of findings to other countries. Practical implications The findings suggest that managers should revise their risk disclosure strategies to provide in-depth details on firm risk. Investors might require information and thorough assessment to evaluate investment risks when firms provide generic risk disclosures and smoothed earnings by consulting sources like financial intermediaries. Regulators should keep an eye on firms reporting boilerplate risk disclosures and on how smoothing earnings impacts the firm perceived risk following economic turmoil, to guide interventions that promote market stability. Originality/value The findings provide new insights into when and how managers use their financial reporting discretion to make firms appear less risky and, therefore, influence investors’ risk perceptions.