Corporate governance and firm risk

Sudha Mathew · Salma S. Ibrahim · Stuart Archbold

115 citations0/0 files storedCorporate Governance

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Corporate Finance and Governance Risk Management in Financial Firms Corporate Governance and Financial Management

Abstract

Purpose This study aims to explore the relationship between board governance structure and firm risk. In particular, this study develops a “governance index” based on four aspects of the board: board composition, board leadership structure, board member characteristics and board processes, and it examines how the overall index relates to firm risk. Design/methodology/approach The study is conducted using a sample of 268 UK firms from the FTSE 350 index over the period from 2005 to 2010. An index is constructed to capture the overall governance structure of the firm. Regressions of the index on three risk measures are examined. Findings This study finds that the governance index that aggregates the four sets of board attributes is significantly and negatively related to firm risk. Robustness tests confirm this result. Research limitations/implications A large number of studies have explored the relationship between the attributes of corporate boards and firm performance with mixed results. A much smaller number of studies have looked at board attributes and firm risk, but these have either focused on financial sector firms alone or have included only a single or a limited number of attributes. This study, using a broad agency framework, seeks to extend the work on firm risk and board attributes by both expanding industry sectors examined and using a comprehensive set of board attributes. Originality value The findings have policy and practical implications for investors, regulators and chairmen of boards of governors to the extent that they inform these constituencies about the set of board attributes that are associated with firm risk. This study is the first to use a comprehensive measure of governance and relate it to firm risk.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 2003Corporate Governance and Equity Prices 2009Women in the boardroom and their impact on governance and performance☆2008Bank governance, regulation and risk taking 2008What Matters in Corporate Governance?1989Boards of Directors and Corporate Financial Performance: A Review and Integrative Model 2010The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey

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