Corporate governance reform and risk-taking: evidence from a quasi-natural experiment in an emerging market

Research output: Contribution to journalArticle

Abstract

Existing studies suggest that stricter Corporate Governance Reform (CGR) reduces corporate risk-taking, primarily due to higher compliance costs and expanded liabilities of insiders or managers. We revisit the relationship between CGR and risk-taking in an emerging market set-up characterized by weaker market forces of corporate scrutiny and greater insider ownership, which encourages firms to pursue investment conservatism. Using a quasi-natural experiment, we find that stricter CGR leads to greater corporate risk-taking. We further show that risk-taking is an important channel through which CGR enhances firm value. Our findings support the view that stricter CGR can have a positive effect on corporate risk-taking and corporate investment decisions in an evolving regulatory environment.
LanguageEnglish
JournalJournal of Corporate Finance
Early online date22 Aug 2018
DOIs
Publication statusE-pub ahead of print - 22 Aug 2018

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Emerging markets
Natural experiment
Corporate governance reform
Risk taking
Managers
Conservatism
Regulatory environment
Investment decision
Compliance costs
Insider
Insider ownership
Corporate investment
Market forces
Firm value
Liability

Keywords

  • corporate governance reform
  • quasi-natural experiment
  • emerging market
  • risk taking

Cite this

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title = "Corporate governance reform and risk-taking: evidence from a quasi-natural experiment in an emerging market",
abstract = "Existing studies suggest that stricter Corporate Governance Reform (CGR) reduces corporate risk-taking, primarily due to higher compliance costs and expanded liabilities of insiders or managers. We revisit the relationship between CGR and risk-taking in an emerging market set-up characterized by weaker market forces of corporate scrutiny and greater insider ownership, which encourages firms to pursue investment conservatism. Using a quasi-natural experiment, we find that stricter CGR leads to greater corporate risk-taking. We further show that risk-taking is an important channel through which CGR enhances firm value. Our findings support the view that stricter CGR can have a positive effect on corporate risk-taking and corporate investment decisions in an evolving regulatory environment.",
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author = "Santosh Koirala and Andrew Marshall and Suman Neupane and Chandra Thapa",
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AB - Existing studies suggest that stricter Corporate Governance Reform (CGR) reduces corporate risk-taking, primarily due to higher compliance costs and expanded liabilities of insiders or managers. We revisit the relationship between CGR and risk-taking in an emerging market set-up characterized by weaker market forces of corporate scrutiny and greater insider ownership, which encourages firms to pursue investment conservatism. Using a quasi-natural experiment, we find that stricter CGR leads to greater corporate risk-taking. We further show that risk-taking is an important channel through which CGR enhances firm value. Our findings support the view that stricter CGR can have a positive effect on corporate risk-taking and corporate investment decisions in an evolving regulatory environment.

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