CEO inside debt, market competition and corporate risk taking

2019 ◽  
Vol 15 (4) ◽  
pp. 636-657 ◽  
Author(s):  
Shahbaz Sheikh
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Ordinary Least Squares ◽  
Negative Association ◽  
Firm Risk ◽  
Content Type ◽  
Inside Debt ◽  
Debt Market ◽  
Practical Tool ◽  
Corporate Risk

Purpose The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking. Design/methodology/approach Ordinary least squares regressions are used to estimate the relation between CEO inside debt and firm risk. Additionally, instrumental variable (IV-GMM) regressions are used to check the robustness of the results. Findings The results of this paper indicate that CEO inside debt is negatively associated with the measures of future risk. However, this negative association is influenced by market competition. Specifically, CEO inside debt results in lower levels of firm risk when market competition is high. When market competition is low, inside debt has no effect on firm risk. Additional results show that CEOs with large inside debt tend to decrease R&D investments and financial leverage and increase firm cash holdings and working capital only when market competition is high. Overall, these results suggest that market competition significantly influences the effect of CEO inside debt on corporate risk-taking by changing the strength of incentives from inside debt. Practical implications CEO inside debt could be used to provide incentives to CEOs to manage corporate risk-taking. Social implications The empirical results in this paper provide a practical tool to the boards of corporations to manage corporate risk-taking. The results suggest that boards can reduce excessive risk-taking by increasing the level of debt type compensation incentives. However, this strategy is effective only when market competition is high because in such markets inside debt provides the strongest incentives to reduce corporate risk. When competition is low, incentives from inside debt are ineffective in managing corporate risk-taking. Originality/value This is the first study that shows that the negative association between CEO inside debt and corporate risk-taking critically depends on the intensity of market competition.

The ascension of executives' tenure, corporate risk-taking and corporate performance: evidence from Malaysia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Osama F. Atayah ◽  
Khakan Najaf ◽  
Ravichandran K. Subramaniam ◽  
Phaik Nie Chin
Keyword(s):  
Risk Taking ◽  
Corporate Performance ◽  
Stock Exchange ◽  
Generalized Method Of Moments ◽  
Negative Relationship ◽  
Ordinary Least Squares ◽  
Executive Management ◽  
Content Type ◽  
Top Executives ◽  
Corporate Risk

PurposeThis study aims to investigate the implication of top executives’ number of years of experience (tenure) on corporate risk-taking behaviour and corporate performance in Malaysian corporations.Design/methodology/approachTo test the hypothesis efficiently, the authors have extracted the data from Bloomberg for 788 listed companies of the Malaysian Stock Exchange. The methodology entails ordinary least squares regressions, quantile regression and dynamic system generalized method of moments model.FindingsFirst, the authors show that executive management tenure has a significant negative relationship with corporate risk-taking. It means that the long-tenured executives tend to undertake less risky strategies and decisions. Second, this study reveals that the longer executive management tenure has a positive relationship with corporate performance. Third, the moderating effect of corporate risk-taking with executive tenure (Tenure dummy*Risk) has a negative relationship with the corporate performance by 1%.Practical implicationsIt implies that the appointment of experienced executive management contributes towards corporate performance directly. However, experienced management trends take less risk, which eventually results in mitigating the corporate performance. On that basis, the findings are significant in highlighting the usefulness of executive leadership term and offers insights to academics, practitioners and policymakers.Originality/valueThis paper is novel since it is unique in evaluating the executive tenure and the preferences to handle risk strategies and how that impact the firm performance.

Which formula for corporate risk-taking around the world? Exploring happiness as the “black box”

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Thao Phuong Tran ◽  
Anh-Tuan Le
Keyword(s):  
Risk Taking ◽  
Negative Influence ◽  
Current Debate ◽  
Alternative Measure ◽  
Firm Risk ◽  
Content Type ◽  
Financial Decisions ◽  
The World ◽  
Corporate Risk

PurposeThis paper examines how the degree of happiness affects corporate risk-taking and the moderating influence of family ownership of firms on this relationship.Design/methodology/approachThe authors use an international sample of 17,654 firm-year observations from 24 countries around the world from 2008 to 2016.FindingsUsing the happiness index from the World Happiness Report developed by the United Nations Sustainable Development Solutions Network, the authors show that a country's overall happiness is negatively correlated with risk-taking behavior by firms. The findings are robust to an alternative measure of risk-taking by firms. Further analyses document that the negative influence of happiness on firm risk-taking is more pronounced for family-owned firms.Practical implicationsThe paper is consistent with the notion that happier people are likely to be more risk-averse in making financial decisions, which, in turn, reduces corporate risk-taking.Originality/valueThis study contributes to the broad literature on the determinants of corporate risk-taking and the growing literature on the role of sentiment on investment decisions. The authors contribute to the current debate about family-owned firms by demonstrating that the presence of family trust strengthens the negative influence of happiness on corporate risk-taking, a topic that has been unexplored in previous studies.

scholarly journals Risk committee, corporate risk-taking and firm value

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Md. Borhan Uddin Bhuiyan ◽  
Muhammad A. Cheema ◽  
Yimei Man
Keyword(s):  
Risk Taking ◽  
Firm Value ◽  
Firm Risk ◽  
Content Type ◽  
Potential Risks ◽  
Risk Committee ◽  
Corporate Risk ◽  
The Impact ◽  
Practical Implications

PurposeThe authors empirically examine the impact of the stand-alone risk committee on corporate risk-taking and firm value.Design/methodology/approachThe authors argue that the existence of a stand-alone risk committee enhances the quality of corporate governance, which reduces corporate risk-taking and strengthens the firm value that might improve investor protection.FindingsThe authors find corporate risk-taking decline significantly for firms that have a stand-alone risk committee compared with firms that have a joint audit and risk committee. The authors also find that the presence of a stand-alone risk committee is positively associated with firm value.Practical implicationsThe evidence is consistent with the proposition that firms with a stand-alone risk committee can effectively evaluate potential risks and implement a proper risk management system.Originality/valueThis is the first paper that investigates the association between the existence of a stand-alone risk committee and firm risk-taking in a multi-industry setting. Also, our research extends the association between a stand-alone risk committee and firm value.

Corporate risk-taking after changes in credit rating

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hardjo Koerniadi
Keyword(s):  
Risk Taking ◽  
Credit Rating ◽  
Firm Risk ◽  
Content Type ◽  
Event Risk ◽  
Effect Regression ◽  
Investment Grade ◽  
Corporate Risk ◽  
Practical Implications

PurposeThe paper aims to investigate corporate risk-taking following changes in firms' credit ratings (CR) and the mechanisms the firms use in implementing the risk-taking.Design/methodology/approachThe paper employs fixed-effect regression models to examine risk-taking behaviour after firms experience changes in CR after their ratings are downgraded to the lower edge of the investment grade rating (i.e. BBB-) and after their CRs are downgraded below the investment rating.FindingsThe paper finds that, whilst in general, changes in CR are negatively associated with post-event risk-taking, firms downgraded to BBB- do not increase their risk-taking. Only when firms are rated below this grade, firms significantly increase their risk-taking, suggesting that the association between downgrades in CR and firm risk-taking following the event is not linear. Further analysis suggests that these downgraded firms do not increase research and development (R&D) expenses or capital expenditures but employ long-term debt as their risk-taking mechanism.Practical implicationsThe findings of the paper have practical implications for investors considering investing in downgraded-rating firms to shareholders of such firms and especially to those overseeing the firms' risk-taking policies.Originality/valueThe study fills the gap in the literature by providing empirical evidence on corporate risk-taking after changes in CR and also contributes to the optimal debt-maturity choice literature.

Board gender diversity: performance and risk of Brazilian firms

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mauro Mastella ◽  
Daniel Vancin ◽  
Marcelo Perlin ◽  
Guilherme Kirch
Keyword(s):  
Firm Performance ◽  
Boards Of Directors ◽  
Gender Diversity ◽  
Ordinary Least Squares ◽  
Firm Risk ◽  
Content Type ◽  
Study Approach ◽  
Female Presence ◽  
Board Gender Diversity ◽  
The Impact

Purpose This study aims to intend to check if female board representation affects performance and risk and to analyse the evolution of the demographic aspects of the presence of women on boards in Brazil. Design/methodology/approach The authors used a sample of 150 Brazilian publicly traded companies from 2010–2018, with different measures of firm performance, firm risk and women’s presence on the board. The study approach is based on a set of ordinary least squares, quantile and panel data regressions. Findings The presence of women on the board has a positive effect on all of our accounting and market performance measures. However, the result of the impact on risk is not conclusive. The study also found that the number of females on the board has a more significant effect at the lower levels of firm performance measured by return on equity, but at the higher levels when measured by Tobin’s Q. Regarding return on assets, the more significant effect happened on the extremes of the performance distribution. The study findings point that market investors place more value in female presence on the board than in director positions. Originality/value By estimating the impact of women’s presence on the boards of directors in firm performance and risk, this study aimed to verify this impact in different aspects of the company. In addition, the authors did so in a sample with many years, making it possible to evaluate the historical evolution of the feminine presence in the boards of administration as well as in the groups of directors, assisting Brazilian legislators with new evidence about the possible impacts of Draft Law 7179/2017.

Taxes and risk-taking behavior: evidence from mergers and acquisitions in the G7 nations

2018 ◽  
Vol 19 (3) ◽  
pp. 277-294
Author(s):  
Poonyawat Sreesing
Keyword(s):  
Mergers And Acquisitions ◽  
Option Pricing ◽  
Risk Taking ◽  
Investment Decisions ◽  
Tax Rates ◽  
Content Type ◽  
Asset Risk ◽  
Tax Effects ◽  
Corporate Risk

PurposeThis study aims to examine how corporate taxes affect corporate risk-taking decisions.Design/methodology/approachThis study examines corporate risk-taking by analyzing how a firm’s asset risk changes following an acquisition carried out by publicly listed companies in the G7 nations. To measure the asset risk of a firm, this study uses the option pricing framework in Merton (1974).FindingsConsistent with an implication of the Merton (1974) framework, the findings show that firms take more risk in their investment decisions when tax rates are high. Moreover, the tax effects wane for firms with a relatively large borrowing opportunity and this suggests that the risk-taking incentive from taxes is moderated by the reputation concern in the debt market, lending support to the Diamond (1989) reputation-building model. The empirical results also show that the tax-induced risk-taking incentive is restrained by creditor rights. Overall, the study reveals an important role of taxes in the structure of corporate investment decisions.Practical implicationsThe implications of this study can be beneficial to policymakers when considering the alteration of tax rates, as it will affect the riskiness of firm investment decisions.Originality/valueThis study provides a better understanding of the role of taxes on risk-taking and also contributes to the growing body of evidence supporting tax effects of risk-taking. The relationship between taxes and risk-taking has proven that the corporate taxation is one of the key factors that firms consider during their selection of risky investments. Unlike previous studies, this research is the first to investigate the change in asset risk, estimating by the option pricing framework, through studying a particular event: mergers and acquisitions.

scholarly journals Corporate risk and the humpback of CEO narcissism

2018 ◽  
Vol 10 (3) ◽  
pp. 252-273 ◽  
Author(s):  
Tom Aabo ◽  
Nicklas Bang Eriksen
Keyword(s):  
Risk Taking ◽  
Stock Return ◽  
Return Volatility ◽  
Moderate Degree ◽  
Content Type ◽  
Stock Return Volatility ◽  
Unobtrusive Measure ◽  
Ceo Narcissism ◽  
High Level ◽  
Corporate Risk

Purpose The purpose of this paper is to investigate the association between CEO narcissism and corporate risk taking. Design/methodology/approach The authors provide a novel and unobtrusive measure of CEO narcissism based on LinkedIn profiling. The authors investigate the relationship between CEO narcissism and corporate risk taking (stock return volatility) for a sample of 475 US manufacturing firms in the period 2010-2014. Findings The authors find an inverse U-shape relationship between CEO narcissism and stock return volatility. The inverse U-shape relationship (the “humpback”) is caused by the paradoxical nature of the narcissistic personality in which the self-esteem is high but at the same time fragile with a combination of self-admiration and a constant need of having this positive self-view confirmed. The results are robust to alternative specifications of CEO narcissism and corporate risk taking. The results are economically meaningful. Thus, a moderate degree of CEO narcissism – as compared to a very low or a very high level of CEO narcissism – is associated with an increase in corporate risk taking of approximately 12 percent. Originality/value Previous literature provides multiple analyses on the association between managerial overconfidence and corporate decisions. As opposed to overconfidence, narcissism is a personality trait having both cognitive and behavioral dimensions. This paper provides a novel contribution to the growing literature on the association between managerial biases/traits and corporate decision-making.

Corruption and corporate risk-taking: evidence from emerging markets

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Quoc Trung Tran
Keyword(s):  
Emerging Markets ◽  
Risk Taking ◽  
Information Disclosure ◽  
Emerging Market ◽  
Generalized Method Of Moments ◽  
Content Type ◽  
Financing Cost ◽  
Market Index ◽  
Public Enemy ◽  
Corporate Risk

PurposeThis paper investigates the relationship between corruption and corporate risk-taking in emerging markets where corruption is considered as “public enemy number one.”Design/methodology/approachThe study measures corruption based on Corruption Control Index annually published by World Bank and examines how corruption affects corporate risk-taking in emerging markets covered in MSCI Emerging Market Index.FindingsWith a sample of 75,338 observations from 8,326 firms across 20 emerging stock markets during the period 2005–2016, the author finds that corruption negatively affects corporate risk-taking. Robustness checks with a reduced sample without China and India, alternatives of corruption measures, various measures of risk-taking and Generalized method of moments (GMM) estimator also show consistent results. Moreover, additional analysis shows that information disclosure mitigates the effect of corruption on risk-taking.Originality/valueThe extant literature implies that corruption may decrease corporate risk-taking behavior through two channels including operational cost and debt financing cost.

Corporate risk taking and sustainability: a case of listed firms from USA and Germany

2019 ◽  
Vol 10 (1) ◽  
pp. 2-15 ◽  
Author(s):  
Zahid Irhsad Younas ◽  
Ameena Zafar
Keyword(s):  
Risk Taking ◽  
Profit Maximization ◽  
Well Being ◽  
Least Square ◽  
Board Structure ◽  
Best Interest ◽  
Content Type ◽  
Listed Firms ◽  
Corporate Risk ◽  
The Impact

PurposeThis study aims to analyze the impact of corporate risk taking on the sustainability of firms in USA and Germany. As risk taking is an expensive phenomenon, the firm may shift the resources from stakeholder well-being to profit maximization of shareholders. Ultimately, risk taking results in the reduction of firm’s sustainability.Design/methodology/approachTo capture the impact of corporate risk taking, the corporate-governance variables, i.e. “independent board structure” and “board size,” were used as instrumental variables to control excessive corporate risk taking and restrict it at a healthy level. A sample of 3,387 unbalanced panel observations from USA and Germany, for the period 2004-2015, were assessed.FindingsThe results confirm that corporate risk taking has a negative and significant impact on the sustainability of firms.Research limitations/implicationsGovernment and policymakers in USA and Germany may introduce regulations to curb excessive corporate risk taking for sustainable corporations and sustainable society. This research suggests that corporate risk taking is not in the best interest of stakeholders.Originality/valuePrevious literature only finds the impact of sustainability on corporate risk taking and there is not a single study that examines the impact of corporate risk taking on the sustainability of a firm. Thus, this study contributes to existing literature on corporate risk taking and sustainability. The study further contributes by using the instrumental variable two stage least square.

Risky business and the boards who play that way

2016 ◽  
Vol 32 (8) ◽  
pp. 21-23
Keyword(s):  
Risk Taking ◽  
Design Methodology ◽  
Firm Risk ◽  
Content Type ◽  
Women On Boards ◽  
Board Directors ◽  
Pertinent Information ◽  
Equity Ownership ◽  
Risky Business ◽  
Practical Implications

Purpose This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies. Design/methodology/approach This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context. Findings Examines data from 260 companies on the UK’s FTSE 350 market to consider the extent to which risk-taking in businesses is related to the composition of boards. Establishes that there are board attributes that are significantly related to firm risk. In particular, these boards might be small in size, have high equity ownership among executive board directors and also have high institutional investor ownership. There is some lesser evidence that a greater number of women on boards might lead to a decrease in risk-taking. Practical implications The paper provides strategic insights and practical thinking that have influenced some of the world’s leading organizations. Originality/value The briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

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