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

Koirala, Santosh and Marshall, Andrew and Neupane, Suman and Thapa, Chandra (2018) Corporate governance reform and risk-taking : evidence from a quasi-natural experiment in an emerging market. Journal of Corporate Finance. ISSN 0929-1199

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    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.