Article ID Journal Published Year Pages File Type
5069575 Finance Research Letters 2015 8 Pages PDF
Abstract

•We assess the effect of corporate governance on the extent of risk-taking.•More effective governance leads to significantly less risk-taking.•We use comprehensive governance metrics provided by ISS.•The 2SLS analysis and propensity-score matching confirm the results.

We provide evidence on the effect of corporate governance on the extent of corporate risk-taking. Provided by the Institutional Shareholder Services (ISS), our governance metrics are among the most comprehensive in the literature. Our results show that firms with more effective governance exhibit corporate strategies that are significantly less risky. Left to their own devices, managers tend to take excessive risk. Effective governance, however, reduces the degree of risk-taking significantly. Exploiting the passage of the Sarbanes-Oxley Act of 2002 as an exogenous shock that improves governance quality, we show that the effect of corporate governance on risk-taking is likely causal.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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