Risk-reduction Hypothesis Research Articles

Business groups and the impact of industry relatedness on firms' borrowing costs

PurposeThis study analyzes whether industry relatedness between a corporate borrower and its group peers significantly affects that firm's borrowing cost.Design/methodology/approachA regression analysis is run on bank-loan data of a sample of Indonesian companies for 2010–2020. The main variables of interest are the natural logarithms of the borrowing firm's number of affiliates classified within either similar 2- or 4-digit GICS industries, and the Caves weighted index of these firms' related diversification. This index measures how firms in a group are diversified in relation to the borrower. The dependent variable is the all-in credit spread, stated in basis points, over the LIBOR or similar benchmark, as of the loan issuance date.FindingsFindings support the industry-relatedness hypothesis and contradict the risk-reduction hypothesis and show that banks charge lower loan spreads on a borrowing firm that either operates within a similar industry as its affiliate or diversifies into related sectors or industries. Consistent with the co-insurance-effect hypothesis, the results also underline the importance of the parent and first-layer firms as supporting instead of the tunneling vehicles within business groups. These conclusions hold even after segregating the sample and using the loan maturity as the dependent variable.Originality/valueThis study uses a unique diversification measurement based on the borrowing firm's sector or industry, relative to other group members, and offers new insights on business group diversification and bank loan costs.

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.

CSR and Firm Risk: Is Shareholder Activism a Double-Edged Sword?

Few can argue with the notion that corporations should at least consider corporate social responsibility (CSR) to better understand the impact of their operations on society. However, recent empirical tests suggest CSR has an ambiguous impact on firm performance. To shed new light on this debate, we examine the extent to which voting support for nonbinding shareholder-initiated CSR proposals is empirically linked to changes in firms’ underlying systematic risks. Using a rich dataset of proposals in the US from 1998 to 2011, we contribute several novel findings. First, we show that shareholder voting support is nonlinearly linked to changes in systematic risk. Specifically, proposals with low voting support increase risk while those with high support decrease risk. This nonlinearity is particularly pronounced for consumer-sensitive firms that cater primarily to individual consumers rather than for firms in non-consumer-sensitive industries that produce goods or services meant for industrial or governmental use. Second, the 2007–2009 financial crisis exacerbated increases in firms’ systematic risks for proposals with low voting support. Our results, which highlight asymmetry regarding firms’ CSR initiatives, remain robust when controlling for firm-specific factors as well as shifts in investor sentiment. From a risk management perspective, our findings suggest that CSR initiatives need strong shareholder support to realize benefits from the so-called ‘risk-reduction hypothesis’.

Scoring Sufficiency Economy Philosophy through GRI Standards and Firm Risk: A Case Study of Thai Listed Companies

The purpose of this study is to evaluate sufficiency economy philosophy (SEP) performance through annual reports and voluntary sustainable development reports and examines the relationship between SEP performance and firm-specific risk of Thai listed companies from 2013 to 2018. Based on global reporting initiative (GRI) standards, the SEP performance was measured by aligning each GRI topic with each of the SEP elements to create an SEP scoring system. The scoring system was applied and tested by evaluating 34 firms for six years. The outcome scores were recorded in panel data structure and used to test two competing hypotheses of risk reduction and managerial opportunism. The regression results supported the risk reduction hypothesis and thus practicing SEP reduced firm-specific risk. Since our sample was limited to 34 firms, a two-stage least squares instrumental variable (2SLS-IV) analysis was performed to estimate the causal relationship between SEP performance and firm-specific risk. The result remained negatively and significantly correlated, indicating that SEP practice stimulated business sustainability. The finding suggested that the SEP scoring system was able to capture SEP performance and practicing SEP appeared to reduce firm-specific risk, which was consistent with the risk reduction hypothesis of the stakeholder theory.

Dividends and financial health: Evidence from U.S. bank holding companies

Using a large sample of U.S. bank holding companies from 1986 to 2020, we show that there is a positive relationship between banks' dividends lagged by one quarter and their financial health in the current quarter. We also find that this positive relationship is more pronounced for banks with lower capital adequacy and during the 2007–2009 financial crisis, indicating that it is more necessary for banks with these characteristics to use dividends to convey information regarding their financial health. Our additional analyses suggest that total payout is also positively associated with bank financial health, and that the positive relationship between dividends and financial health applies to private banks as well, but that the magnitude is weaker for them than for public banks. Our overall findings primarily complement a risk reduction hypothesis in corporate finance and bank payout policies.

Time-Varying Relations between Seven Dimensions of CSR and Firm Risk

This study examines the relationship between corporate social responsibility (CSR), a central ethical concern, and firm total risk, a central business concern, using a large US dataset spanning 1991 to 2015. It includes considerations for the recent financial crisis to establish whether firm engagement in specific CSR dimensions decrease (i.e., the risk reduction hypothesis) or increase (i.e., the resource constraint hypothesis) firm risk. The findings demonstrate the impact of CSR engagement is different, depending on the specific CSR dimension in question, and the relationship between each of the seven CSR dimensions and total risk is time varying. Our empirical evidence suggests that firms should prioritize different CSR dimensions as an integral part of their CSR strategies and strategic management and change the priority in different market conditions.

Corporate Social Responsibility Information Disclosure and Corporate Fraud—“Risk Reduction” Effect or “Window Dressing” Effect?

We examine the impact in Chinese capital markets of publishing information on corporate fraud in a corporate social responsibility (CSR) report. We develop and test two competing hypotheses of “risk reduction” and “window dressing”. Based on the listed company’s CSR report, we analyze the effect of CSR disclosure on the commission of corporate fraud, fraud detection and the severity of corporate fraud. The research results show that after controlling for the firms’ characteristics and corporate governance factors, the CSR report’s information disclosures have a significantly negative relation to corporate fraud. Specifically, the CSR report’s publication reduces the information asymmetry between the insiders and the stakeholders, thus decreasing the tendency to commit fraud. Our findings support the risk reduction hypothesis but not the window dressing hypothesis. Further research shows that firms with a good CSR disclosure practice have a lower probability of committing corporate fraud and have fewer types of fraud violations, thereby mitigating the severity of corporate fraud.

Land fragmentation with double dividends – the case of Tanzanian agriculture

AbstractThis study evaluates the economic effects of land fragmentation on agricultural production and hypothesises that fragmentation may benefit farmers by diversifying production risk among separate land plots with heterogeneous agronomic conditions. Applying a stochastic production frontier model to the Tanzania Living Standards Measurement Study data, we find robust evidence to support the risk-reduction hypothesis, as well as indications that fragmentation is positively associated with technical efficiency. We argue the low level of fragmentation in Tanzania may have limited its negative impact on efficiency, while crop diversification concurrent with fragmentation may have increased efficiency, leaving the net effect to be positive.

Cigarette smoking among Chinese PLWHA: An exploration of changes in smoking after being tested HIV positive

ABSTRACTPrevention and cessation of Tobacco use among persons living with HIV/AIDS (PLWHA) represents a significant challenge for HIV/AIDS patient care in China and across the globe. Awareness of HIV-positive status may alter the likelihood for PLWHA smokers to change their smoking habit. In this study, we tested the risk enhancement and risk reduction hypotheses by assessing changes in cigarette smoking behavior among PLWHA after they received the positive results of their HIV tests. Cross-sectional survey data collected from a random sample of 2973 PLWHA in care in Guangxi, China were analyzed. Changes in cigarette smoking after receiving the HIV-positive test results, as well as the current levels of cigarette smoking were measured. Among the total participants, 1529 (51.7%) were self-identified as cigarette smokers, of whom 436 (28.9%) reduced smoking and 286 (19.0%) quit after receiving their HIV-positive test results. Among the quitters, 210 (73.9%) remained abstinent for a median duration of two years. There were also 124 (8.2%) who increased cigarette smoking. Older age, female gender, more education, and receiving antiretroviral therapy were associated with quitting. In conclusion, our study findings support the risk reduction and risk enhancement hypotheses. A large proportion of smoking PLWHA reduced or quit smoking, while a small proportion increased smoking. Findings of this study suggest that the timing when a person receives his or her HIV-positive test result may be an ideal opportunity for care providers to deliver tobacco cessation interventions. Longitudinal studies are indicated to verify the findings of this study and to support smoking cessation intervention among PLWHA in the future.

Corporate Environmental Responsibility and Firm Risk

In this study, we examine the relation between corporate environmental responsibility (CER) and risk in U.S. public firms. We develop and test the risk-reduction, resource-constraint, and cross-industry variation hypotheses. Using an extensive U.S. sample during the 1991–2012 period, we find that for U.S. industries as a whole, CER engagement inversely affects firm risk after controlling for various firm characteristics. The result remains robust when we use firm fixed effect or an alternative measure of CER using principal component analysis or downside risk measures. To address the concern of endogeneity bias, we use a system equations approach and dynamic system generalized methods of moment regressions, and continue to find that environmentally responsible firms experience lower risk. These findings support the risk-reduction hypothesis, but not the resource-constraint hypothesis, along with the notion that the top management in U.S. firms is generally risk averse and that their CER engagement facilitates their risk management efforts. Our cross-industry analysis further reveals that the inverse CER-risk association mainly comes from the manufacturing sector, whereas in the service sector, CER tends to increase firm risk.

Does CSR Reduce Firm Risk? Evidence from Controversial Industry Sectors

In this paper, we examine the relation between corporate social responsibility (CSR) and firm risk in controversial industry sectors. We develop and test two competing hypotheses of risk reduction and window dressing. Employing an extensive U.S. sample during the 1991–2010 period from controversial industry firms, such as alcohol, tobacco, gambling, and others, we find that CSR engagement inversely affects firm risk after controlling for various firm characteristics. To deal with endogeneity issue, we adopt a system equation approach and difference regressions and continue to find that CSR engagement of firms in controversial industry sectors negatively affects firm risk. To examine the premise that firm risk is more of an issue for controversial firms, we further examine the difference between non-controversial and controversial firm samples, and find that the effect of risk reduction through CSR engagement is more economically and statistically significant in controversial industry firms than in non-controversial industry firms. These findings support the risk-reduction hypothesis, but not the window-dressing hypothesis, and the notion that the top management of U.S. firms in controversial industries is, in general, risk averse and that their CSR engagement helps their risk management efforts.

Risk and the evolution of human exchange

Compared with other species, exchange among non-kin is a hallmark of human sociality in both the breadth of individuals and total resources involved. One hypothesis is that extensive exchange evolved to buffer the risks associated with hominid dietary specialization on calorie dense, large packages, especially from hunting. 'Lucky' individuals share food with 'unlucky' individuals with the expectation of reciprocity when roles are reversed. Cross-cultural data provide prima facie evidence of pair-wise reciprocity and an almost universal association of high-variance (HV) resources with greater exchange. However, such evidence is not definitive; an alternative hypothesis is that food sharing is really 'tolerated theft', in which individuals possessing more food allow others to steal from them, owing to the threat of violence from hungry individuals. Pair-wise correlations may reflect proximity providing greater opportunities for mutual theft of food. We report a laboratory experiment of foraging and food consumption in a virtual world, designed to test the risk-reduction hypothesis by determining whether people form reciprocal relationships in response to variance of resource acquisition, even when there is no external enforcement of any transfer agreements that might emerge. Individuals can forage in a high-mean, HV patch or a low-mean, low-variance (LV) patch. The key feature of the experimental design is that individuals can transfer resources to others. We find that sharing hardly occurs after LV foraging, but among HV foragers sharing increases dramatically over time. The results provide strong support for the hypothesis that people are pre-disposed to evaluate gains from exchange and respond to unsynchronized variance in resource availability through endogenous reciprocal trading relationships.

Is the diversification discount caused by the book value bias of debt?

We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk. Thus, measures of firm value based on book values of debt undervalue diversified firms relative to focused firms. Our paper complements recent literature which uses market values to test the risk reduction hypothesis for a subsample of firms for which debt is traded. Alternatively, we employ market value of debt estimates for the whole firm universe. Consistent with the above hypothesis, we show that the use of book values of debt underestimates the value of diversified firms. There is no discount for mainly equity financed firms and lower distress risk and equity volatility for diversified firms. More concentrated ownership increases firm valuation.

Abstract PL04-04: Vitamin E and selenium for prostate cancer prevention: The SELECT experience

Abstract The Selenium and Vitamin E Cancer Prevention Trial (SELECT) tested its namesake agents in the prevention of prostate cancer, a continuing major health threat, especially for African American men, in the United States, including Puerto Rico, and Canada. Designed as a large, simple trial conforming as closely as possible with community standards of care, SELECT was a phase III randomized, placebo-controlled trial of selenium (200 g/day from L-selenomethionine) and/or vitamin E (400 IU/day of all rac -tocopheryl acetate) in men at least 55 years of age (non-African American) or at least 50 years of age (African American) with a serum prostate-specific antigen (PSA) ≤ 4 ng/mL and a digital rectal examination (DRE) not suspicious for prostate cancer. The planned intervention duration was a minimum of 7 years, maximum of 12 years. The strongest evidence supporting the SELECT hypothesis came from secondary clinical results indicating that prostate cancer risk was reduced by vitamin E in the Alpha-Tocopherol, Beta-Carotene (ATBC) Study (designed to prevent lung cancer) and by selenium in the Nutritional Prevention of Cancer (NPC) trial (designed to prevent skin cancer); this evidence was supported by epidemiologic and preclinical data. 35,533 men were randomly assigned at a faster-than-expected accrual rate to the four, well-balanced study arms (selenium, vitamin E, selenium plus vitamin E, placebo) between 2001 and 2004. As a result of a planned interim analysis (at 7 years) and by recommendation of the Data and Safety Monitoring Committee, the interventions were discontinued because of convincing evidence of no benefit from either study agent (p < 0.0001) and no possibility of a benefit to the planned degree with additional follow-up. With a median overall follow-up of 5.46 years (range, 4.17 to 7.33 years), the primary analysis showed the following prostate cancer results (versus placebo, n=416): vitamin E hazard ratio (HR) = 1.13 (n=473; 99% confidence interval [CI], 0.95 - 1.35), selenium HR = 1.04 (n=432; 99% CI, 0.87 – 1.24), combination HR = 1.05 (n=437; 99% CI, 0.88 – 1.25). No significant differences were seen in any prespecified cancer endpoints including lung, colorectal, and overall cancer. A nonsignificant increased risk of prostate cancer occurred in the vitamin E arm (p=0.06; relative risk [RR]=1.13; 99% CI, 0.95 – 1.35), and the selenium arm showed a nonsignificant increased risk of Type 2 diabetes mellitus (p=0.16; RR=1.07; 99% CI, 0.94–1.22); neither of these increases appeared in the combination arm. Selenium, vitamin E, and their combination did not reduce the risk of prostate cancer in SELECT. One important lesson learned from the SELECT experience, building on lessons learned from the earlier ATBC and NPC experiences, is that we should step back and do more small, lead-up preclinical and early-phase clinical studies that increase our understanding of cancer biology and agent effects before moving ahead with large clinical trials of natural or other potential preventive agents. Epidemiologic and secondary clinical data are great pathfinders, but the heaviest supportive evidence for definitive trials may come mainly from more extensive preliminary research, including mechanistic studies that can validate the biologic plausibility of the clinical, risk reduction hypothesis. Another important lesson SELECT has provided for any large prevention trial is built-in opportunity for translational research. The SELECT design comprised sub-studies of molecular and standard epidemiology, diet and nutrition, and other important correlative endpoints that informed the collection of data and biospecimens in the trial and resulted in an invaluable repository for future research. Support for this work was received from Public Health Service Cooperative Agreement grant CA37429 (National Cancer Institute, National Institutes of Health, Department of Health and Human Services) and from the National Center for Complementary and Alternative Medicine (National Institutes of Health). Citation Information: Cancer Prev Res 2010;3(1 Suppl):PL04-04.

Is the Diversification Discount Caused by the Book Value Bias of Debt?

We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk. Thus, measures of firm value based on book values of debt undervalue diversified firms relative to focused firms. Our paper complements recent literature which uses market values to test the risk reduction hypothesis for a subsample of firms for which debt is traded. Alternatively, we employ market value of debt estimates for the whole firm universe. Consistent with the above hypothesis, we show that the use of book values of debt underestimates the value of diversified firms. There is no discount for mainly equity financed firms and lower distress risk and equity volatility for diversified firms. More concentrated ownership increases firm valuation.

Determinants of National Fire Plan Fuels Treatment Expenditures: A Revealed Preference Analysis for Northern New Mexico

The accumulation of fire fuels in forests throughout the world contributes significantly to the severity of wildfires. To combat the threat of wildfire, especially in the wildland-urban interface (WUI), US federal land management agencies have implemented a number of forest restoration and wildfire risk reduction programs. In the spirit of revealed preference analyses, the objective of this study is to investigate the pattern and determinants of National Fire Plan (NFP) expenditures for fuel reduction treatments in northern New Mexico (USA). Estimation results from a set of Generalized Estimating Equations models are mixed with respect to risk reduction hypotheses, and also raise issues regarding how risk reduction should be defined for a region characterized by both pockets of urban sprawl into the WUI and large areas of chronic rural poverty. Program preferences for project funding under the federal Collaborative Forest Restoration Program in New Mexico are shown to be distinctly different (e.g., exhibiting greater concern for social equity) than for other NFP-funded projects.

The announcement impact of seasoned equity offerings on bondholder wealth

Previous studies document a negative return to equity on the announcement of an SEO. However, the effects of SEO announcements on bonds have received little attention. We find that bondholders experience a significant positive return on the announcement of an SEO and this effect is more pronounced for bonds with lower ratings. We examine alternate explanations for bond market reactions to SEO announcements including the leverage risk reduction, wealth transfer, and information signaling hypotheses. Overall, our results are most consistent with the leverage risk reduction hypothesis.

Risk Reduction as a CEO's Motive for Corporate Cash Holdings

We empirically test the risk-reduction hypothesis of the agency theory in the context of corporate cash holdings. Since corporate cash holdings can be viewed as risk-free investments, the risk-reduction hypothesis predicts that a risk-averse and self-interested CEO allocates more firm assets to corporate cash holdings to reduce firm risk at the expense of giving up some positive NPV but risky projects, which is not beneficial to shareholders. We use the sensitivity of the value of a CEO's stock options to stock return volatility (Executive Stock Options risk incentives) to study the relation between a CEO's risk incentives and corporate cash holdings. We find that firms with lower ESO risk incentives have more corporate cash holdings. We find that more corporate cash holdings reduce firm risk, and that corporate cash holdings have a negative marginal impact on firm value due to the risk-related agency problem. These findings are consistent with the risk-reduction hypothesis of the agency theory in the context of corporate cash holdings.

Multiscale wolf predation risk for elk: does migration reduce risk?

While migration is hypothesized to reduce predation risk for ungulates, there have been few direct empirical tests of this hypothesis. Furthermore, few studies examined multiscale predation risk avoidance by migrant ungulates, yet recent research reveals that predator-prey interactions occur at multiple scales. We test the predation risk reduction hypothesis at two spatial scales in a partially migratory elk (Cervus elaphus) population by comparing exposure of migrant and resident elk to wolf (Canis lupus) predation risk. We used GPS and VHF telemetry data collected from 67 migrant and 44 resident elk over the summers of 2002-2004 in and adjacent to Banff National Park (BNP), Canada. We used wolf GPS and VHF telemetry data to estimate predation risk as a function of the relative probability of wolf occurrence weighted by a spatial density model that adjusted for varying pack sizes. We validated the predation risk model using independent data on wolf-killed elk, and showed that combining wolf presence and spatial density best predicted where an elk was likely to be killed. Predation risk on summer ranges of migrant elk was reduced by 70% compared to within resident elk summer ranges. Because wolves avoided areas near high human activity, however, fine-scale selection by resident elk for areas near high human activity reduced their predation risk exposure to only 15% higher than migrants, a difference significant in only one of three summers. Finally, during actual migration, elk were exposed to 1.7 times more predation risk than residents, even though migration was rapid. Our results support the hypothesis that large-scale migrations can reduce predation. However, we also show that where small-scale spatial variation in predation risk exists, nonmigratory elk may equally reduce predation risk as effectively as migrants under some circumstances.

Social sharing and risk reduction: Exploring a computational algorithm for the psychology of windfall gains

Sharing important resources widely beyond direct kin group members is one of the core features characterizing human societies. Moreover, generalized exchange involving many community members (e.g., meat sharing in bands) seems to be a uniquely human practice. This paper explores a computational algorithm for the psychology of social sharing that may underlie such practices, based on the risk-reduction hypothesis in food sharing of Kaplan and Hill [Curr. Anthropol. 26 (1985) 223]. We predicted that, independent of the amount of effort actually invested, uncertainty involved in resource acquisition is a key factor that triggers the psychology of social sharing for both acquirers and nonacquirers of a resource. It was also predicted that the “windfall effect” is independent of individual preferences as to modern distributive ideologies. Four multisample/multimethod studies, using Japanese and American participants, and laboratory as well as vignette experiments, supported these predictions: although the identical fungible resource (money) was under consideration, different psychological processes were triggered, depending on the degree of uncertainty involved in the money acquisition. Implications of the windfall effect for egalitarianism in resource sharing, observed not only in hunter–gatherer bands but also in highly industrialized societies, are discussed.