Corporate Governance and its Impact on Firm Risk

Topics: Management, Corporate governance, Board of directors Pages: 2 (661 words) Published: January 22, 2015


Article Review No. 3

TOPIC:Corporate Governance and its Impact on Firm Risk

SOURCE: Alam, A., Shah, S., (2013) Corporate Governance and its Impact on Firm Risk. International Journal of Economy, Management and Social Sciences, Vol 2, No 2, pp. 72-98.

PURPOSE: The aim of this research is to investigate the relationship of corporate governance with firm risk.

METHOD USED:

In order to attain unbiased and consistent estimates, dynamic generalized method of moments (GMM) panel estimation technique used by the authors and corporate governance data for the 106 firms used in this study was collected mainly from individual firm’s annual report. This time period was selected based on the ease of availability of data for the variables.

BRIEF SUMMARY:

Corporate governance measures like board structure, compensation structure and ownership structure are determined by one another, and by variables such as risk, cash flows, firms’ size and regulations etc. Firm risk has a role to play in firm performance, because firms that take more risk generally have higher returns. Firms that engage in risky projects are expected to yield better returns that those which lack the appetite to take risks. However, excessive risk taking may prove to be fatal for a firm Family Ownership and Firm Risk - studies the impact of corporate governance (through family control, bank control and ownership concentration) on risk taking of Japanese firms. Bank Ownership and Firm Risk - Banks are expected to have low risk-taking preferences and are most likely to avoid risky ventures. Ownership Structure and Firm Risk - Managerial ownership plays a significant role in firm’s risk-taking. Lesser ownership in this regard may hold back the managers to indulge in risky projects. Board Independence and Firm Risk - Structuring of a firm’s board of directors also plays a crucial role in reducing the agency costs. Therefore, the role of the executive board’s structure is also...
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