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Corporate risk and corporate governance: another view

Corporate risk and corporate governance: another view Purpose – The purpose of this paper is to investigate the effect of corporate governance strength as measured by the Gompers governance index (gindex) and other related factors on corporate risk as measured by implied volatility of returns. Design/methodology/approach – The research incorporates implied volatility as the measure of risk, as compared to earlier studies that have used historic volatility measures. Governance variables include the Gompers Index, as well as other measures to control for firm size, ownership and leverage. Findings – The findings indicate that corporate risk is significantly inversely‐related with the gindex, which essentially gauges how extensively antitakeover provisions are adopted by a firm. Firm size is the other variable significant in both univariate and multivariate models. Financial leverage and the percentage of outsiders on the board are significantly related to firm risk when not controlling for other factors. Board percentage of voting power does not appear to affect firm riskiness statistically. Research limitations/implications – Future research needs to examine specifically why higher takeover defenses lead to lower implied volatility. This includes exploring whether the lower level of expected volatility is due to lower levels of takeover activity or whether firms with poor governance assume a suboptimal amount of risk. Originality/value – The paper contributes to the literature by the use of implied volatility as the measure of risk. The results are robust and provide further support for the relationship between corporate governance and risk. While counter to initial expectations, these results suggest, at the very least, a firm with good governance may not necessarily have low implied volatility in its stock price. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Corporate risk and corporate governance: another view

Hao Li; John S. Jahera Jr; Keven Yost
Managerial Finance , Volume 39 (3): 24 – Feb 15, 2013
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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074351311302773
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to investigate the effect of corporate governance strength as measured by the Gompers governance index (gindex) and other related factors on corporate risk as measured by implied volatility of returns. Design/methodology/approach – The research incorporates implied volatility as the measure of risk, as compared to earlier studies that have used historic volatility measures. Governance variables include the Gompers Index, as well as other measures to control for firm size, ownership and leverage. Findings – The findings indicate that corporate risk is significantly inversely‐related with the gindex, which essentially gauges how extensively antitakeover provisions are adopted by a firm. Firm size is the other variable significant in both univariate and multivariate models. Financial leverage and the percentage of outsiders on the board are significantly related to firm risk when not controlling for other factors. Board percentage of voting power does not appear to affect firm riskiness statistically. Research limitations/implications – Future research needs to examine specifically why higher takeover defenses lead to lower implied volatility. This includes exploring whether the lower level of expected volatility is due to lower levels of takeover activity or whether firms with poor governance assume a suboptimal amount of risk. Originality/value – The paper contributes to the literature by the use of implied volatility as the measure of risk. The results are robust and provide further support for the relationship between corporate governance and risk. While counter to initial expectations, these results suggest, at the very least, a firm with good governance may not necessarily have low implied volatility in its stock price.

Journal

Managerial Finance – Emerald Publishing

Published: Feb 15, 2013

Keywords: Corporate governance; Corporate strategy; Risk management; Financial performance; Returns

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