scholarly journals Value and risk effects of financial derivatives: Evidence of corporate governance on hedging, speculation and selective hedging strategies

2021 ◽  
Author(s):  
◽  
Rubeena Tashfeen
Keyword(s):  
Corporate Governance ◽  
Firm Value ◽  
Stock Return ◽  
Return Volatility ◽  
Firm Risk ◽  
Governance Mechanisms ◽  
Stock Return Volatility ◽  
The Board Of Directors ◽  
Ceo Age ◽  
Speculative Behavior

<p>This study investigates whether there is a relationship between corporate governance and derivatives, whether corporate governance influence in firms impacts the association between derivatives and firm value, and whether corporate governance influence affects the association between derivatives and cash flow volatility, stock return volatility and market risk. This study uses two different data samples of publicly traded firms listed on the New York Stock Exchange. The first sample comprises a panel of 6900 firm year observations and the other consists of a panel of 6234 firm year observations both over the eight-year period from 2004-2011.  With regard to whether there is a relationship between corporate governance and derivatives, the findings from the empirical results show that corporate governance does influence derivatives and therefore is an important determinant in the firm’s decisions to use derivatives. Of the thirteen corporate governance variables examined, board size, institutional shareholders, CEO age, CEO bonus, CEO salary, insider shareholders and total CEO compensation show significant association with derivatives.  This study finds that derivative users exhibit higher firm value on account of the corporate governance influence, which is correspondingly largely insignificant for derivative non-users. Further the research indicates that the impact of corporate governance varies according to the different types of risks examined. Generally, the board of directors and CEO governance mechanisms reduce stock return volatility to achieve hedging effectiveness. This supports the view that directors and management take actions to reduce stock return volatility to protect their personal portfolios without having to bear the costs of hedging themselves.  With respect to cash flow volatility, the board of directors and CEO related corporate governance mechanisms largely exhibit increased risk to show evidence of speculative behavior. It supports the perceptions that managers and directors have a strong motivation to show higher earnings to protect jobs and reputation and to enhance compensation.  All the shareholder governance mechanisms encourage risk taking with respect to stock return volatility, without any increase in firm value. This is in line with research findings of market granularity by institutional and other larger block holders to indicate that these investors increase stock price volatilities and play the markets for their own financial gain. Besides they have little interest in diversifying firm risk as they already have well protected portfolios and would not want to incur additional costs of hedging.  The study finds evidence of association between corporate governance and hedging, speculation and selective hedging. Of the thirteen corporate governance variables examined in the study board diversity consistently shows hedging effectiveness, with accompanying increase in firm value. While board meetings, institutional shareholders, block shareholders, CEO age, CEO base salary and CEO compensation exhibit exclusive speculative behavior. The remaining corporate governance mechanisms: board size, insider shareholding, CEO tenure, CEO bonus and audit committee size, show evidence of selective hedging behavior.  The concurrent hedging and speculative behavior evidenced in this study supports literature in respect of selective hedging by non-financial firms. It also validates the idea that corporate governance delves in risk allocation strategies that have been evidenced by past research. The results remain unchanged, after using alternative measures for firm value and firm risk, and alternative methods of analyses.</p>

scholarly journals Value and risk effects of financial derivatives: Evidence of corporate governance on hedging, speculation and selective hedging strategies

2021 ◽  
Author(s):  
◽  
Rubeena Tashfeen
Keyword(s):  
Corporate Governance ◽  
Firm Value ◽  
Stock Return ◽  
Return Volatility ◽  
Firm Risk ◽  
Governance Mechanisms ◽  
Stock Return Volatility ◽  
The Board Of Directors ◽  
Ceo Age ◽  
Speculative Behavior

<p>This study investigates whether there is a relationship between corporate governance and derivatives, whether corporate governance influence in firms impacts the association between derivatives and firm value, and whether corporate governance influence affects the association between derivatives and cash flow volatility, stock return volatility and market risk. This study uses two different data samples of publicly traded firms listed on the New York Stock Exchange. The first sample comprises a panel of 6900 firm year observations and the other consists of a panel of 6234 firm year observations both over the eight-year period from 2004-2011.  With regard to whether there is a relationship between corporate governance and derivatives, the findings from the empirical results show that corporate governance does influence derivatives and therefore is an important determinant in the firm’s decisions to use derivatives. Of the thirteen corporate governance variables examined, board size, institutional shareholders, CEO age, CEO bonus, CEO salary, insider shareholders and total CEO compensation show significant association with derivatives.  This study finds that derivative users exhibit higher firm value on account of the corporate governance influence, which is correspondingly largely insignificant for derivative non-users. Further the research indicates that the impact of corporate governance varies according to the different types of risks examined. Generally, the board of directors and CEO governance mechanisms reduce stock return volatility to achieve hedging effectiveness. This supports the view that directors and management take actions to reduce stock return volatility to protect their personal portfolios without having to bear the costs of hedging themselves.  With respect to cash flow volatility, the board of directors and CEO related corporate governance mechanisms largely exhibit increased risk to show evidence of speculative behavior. It supports the perceptions that managers and directors have a strong motivation to show higher earnings to protect jobs and reputation and to enhance compensation.  All the shareholder governance mechanisms encourage risk taking with respect to stock return volatility, without any increase in firm value. This is in line with research findings of market granularity by institutional and other larger block holders to indicate that these investors increase stock price volatilities and play the markets for their own financial gain. Besides they have little interest in diversifying firm risk as they already have well protected portfolios and would not want to incur additional costs of hedging.  The study finds evidence of association between corporate governance and hedging, speculation and selective hedging. Of the thirteen corporate governance variables examined in the study board diversity consistently shows hedging effectiveness, with accompanying increase in firm value. While board meetings, institutional shareholders, block shareholders, CEO age, CEO base salary and CEO compensation exhibit exclusive speculative behavior. The remaining corporate governance mechanisms: board size, insider shareholding, CEO tenure, CEO bonus and audit committee size, show evidence of selective hedging behavior.  The concurrent hedging and speculative behavior evidenced in this study supports literature in respect of selective hedging by non-financial firms. It also validates the idea that corporate governance delves in risk allocation strategies that have been evidenced by past research. The results remain unchanged, after using alternative measures for firm value and firm risk, and alternative methods of analyses.</p>

scholarly journals The risk management role of nonexecutive directors: from capital expenditure perspective

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tho Anh To ◽  
Yoshihisa Suzuki ◽  
Hong Thu Thi Ho ◽  
Siem Thi Tran ◽  
Tuan Quoc Tran
Keyword(s):  
Stock Return ◽  
Capital Expenditure ◽  
Generalized Method Of Moments ◽  
Moderating Effect ◽  
Return Volatility ◽  
Firm Risk ◽  
Content Type ◽  
Listed Firms ◽  
Stock Return Volatility

PurposeThis study investigates the impact of board independence on firm risk of Vietnamese listed firms and the moderating effect of capital expenditure on this relationship.Design/methodology/approachThis paper applies fixed effects and dynamic generalized method of moments (GMM) models to examine hypothesized associations between the proportion of nonexecutive directors and stock return volatility, as well as the moderating effect of capital expenditure. The robustness tests are implemented by applying alternative measures of overinvestment and firm risk.FindingsThe results show that the presence of nonexecutive directors on board increases firm risk. However, the combination of nonexecutive ratio and capital expenditure ratio has a significant negative impact on firm risk. The result is also confirmed by the difference between the monitoring role of nonexecutive directors in overinvesting and underinvesting firms.Research limitations/implicationsThe results imply that Vietnamese listed firms take stock return volatility into consideration before nominating and appointing nonexecutive directors into their board, especially in overinvesting firms. From another perspective, the shift toward having a majority of nonexecutive directors on boards can play a significant role in pursuing a stable or risky business strategy.Originality/valueThis paper investigates the influences of nonexecutive directors on firm risk in the context of Vietnam.

scholarly journals The effectiveness of risk disclosure practices in the European insurance industry

2018 ◽  
Vol 17 (1) ◽  
pp. 130-147
Author(s):  
Irma Malafronte ◽  
Maria Grazia Starita ◽  
John Pereira
Keyword(s):  
Firm Value ◽  
Stock Return ◽  
Insurance Industry ◽  
Return Volatility ◽  
Risk Disclosure ◽  
Content Type ◽  
Stock Return Volatility ◽  
Embedded Value ◽  
European Insurance ◽  
The Relationship

Purpose This paper aims to examine whether risk disclosure practices affect stock return volatility and company value in the European insurance industry. Design/methodology/approach Using a self-constructed “risk disclosure index for insurers” (RDII) to measure the extent of information disclosed on risks and using panel data regression on a sample of European insurers for 2005-2010, it tests the relationship between RDII and stock return volatility; whether this relationship is affected by financial crisis; and whether RDII affects insurance companies’ embedded value. Findings The main results indicate that higher RDII contributes to higher volatility, suggesting that “less is more” rather than “more is good”. However, higher RDII leads to lower volatility when the insurer has a positive net income, thus “more is good when all is good” and “less is good when all is bad”. Furthermore, the relationship between RDII and stock return volatility is not affected by financial crisis, raising concerns regarding the effectiveness of insurers’ risk disclosure to reassure the market. Moreover, higher RDII is found to impact positively on embedded value, thus contributing toward higher firm value. Practical implications The findings could drive insurers’ choices on communication and transparency, alongside regulators’ decisions about market discipline. They also suggest that risk disclosure could be used to strengthen market discipline and should be added to the other variables traditionally used in stock return volatility and firm value estimation models in the insurance industry. Originality/value This paper offers new insights in the debate on the bright and dark sides of risk disclosure in the insurance industry and provides interesting implications for insurers and their stakeholders.

The effects of corporate governance on the stock return volatility

2018 ◽  
Vol 60 (2) ◽  
pp. 478-495 ◽  
Author(s):  
Mouna Aloui ◽  
Anis Jarboui
Keyword(s):  
Corporate Governance ◽  
Stock Prices ◽  
Stock Return ◽  
Market Value ◽  
Independent Directors ◽  
Return Volatility ◽  
Debt Ratio ◽  
Outside Directors ◽  
Content Type ◽  
Stock Return Volatility

Purpose The purpose of this study is to investigate the relationship between the stock return volatility, the outside and the independent directors. Design/methodology/approach The volatility, as the dependent variable in the model, is measured by the standard deviation of annual stock returns. Concerning the independent variable is as follows: The chief executive officer (CEO) is a dummy variable denoting whether or not the chairman of the board holds the position of CEO. The INDD, which represents the independent directors, is measured according to whether the firm appoints independent directors, or by the ratio of independent directors. The FD, which represents the outside directors, is measured according to whether the firm appoints outside directors, or by the ratio of outside directors. In addition, the authors also add the following five control variables to the regression model: the certified public accountant refers to the auditor-related variables including the audit opinion and whether the firm has previously switched accounting firms. The performance (PER) represents the firm performance in terms of the relative return on assets (ROA). The turnover (TURN) is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity, and the leverage ratio (LEV) is the firm’s debt ratio measured by the ratio of total. The TURN is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity and the LEV is the firm’s debt ratio measured by the ratio of total debt to total assets. The sample comprises 89 firms listed on the SBF 120 index over 2006-2012. Findings Results reveal that the outside directors have a positive and significant effect on the stock return volatility. Moreover, the firm’s size and ROA have a negative effect on the stock return volatility, which is clearly evidenced in all the regressions. On the other hand, the CEO, audit size and debt ratio have statically significant and positive effects on the stock return volatility. Originality/value This study indicates the importance of corporate governance and helps investors and financial economists understand the behavior of the stock prices during a financial crisis. Although the existing studies refer to the influence of corporate governance on the stock prices during a crisis, none of these has ever discussed whether better corporate governance can help reduce the stock price volatility in such a situation.

Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk

2009 ◽  
Vol 44 (1) ◽  
pp. 55-83 ◽  
Author(s):  
Deborah L. Murphy ◽  
Ronald E. Shrieves ◽  
Samuel L. Tibbs
Keyword(s):  
Firm Value ◽  
Stock Return ◽  
Earnings Forecasts ◽  
Return Volatility ◽  
Empirical Examination ◽  
Corporate Misconduct ◽  
Stock Return Volatility ◽  
Reported Earnings ◽  
The Relationship ◽  
Increases In Risk

AbstractWe examine the relationship between allegations of corporate misconduct and changes in profitability and risk of the alleged offender. Profitability is measured as reported earnings and analysts’ earnings forecasts. Risk is measured as stock return volatility and concordance among analysts’ forecasts. Decreases in earnings and increases in risk are found to accompany allegations of misconduct, and although the results are somewhat sensitive to the earnings and risk metrics used, the changes are found to be consistently greater for related-party offenses. The importance of reputational penalties is underscored by analysis of the association between allegation-related changes in firm value and changes in earnings and risk.

scholarly journals The monitoring role of nonexecutive directors in Vietnam from a return-volatility perspective

2020 ◽  
Vol 65 (224) ◽  
pp. 29-51
Author(s):  
Anh To ◽  
Quoc Tran ◽  
Thi Tran ◽  
Kim Thai ◽  
Thi Ho
Keyword(s):  
Stock Market ◽  
Agency Theory ◽  
Stock Return ◽  
Board Independence ◽  
Return Volatility ◽  
Executive Directors ◽  
Firm Risk ◽  
Stock Return Volatility ◽  
Alternative Measures

This study examines the relevance of board independence to stock return volatility for a sample of 160 companies listed on the Vietnamese stock market over ten years (2008-2017). After controlling for potential endogeneity, we find that the presence of non-executive directors on the board tends to increase firm risk. The results indicate that non-executive directors do not play a supervisory role under the agency theory. Our findings remain robust when we apply alternative measures of the dependent variable.

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