Does corporate governance have a differential effect on downside and upside risk?

Publication Name

Journal of Business Finance and Accounting


We investigate whether corporate governance has differential effects on downside and upside risk. Intuitively, strong corporate governance should decrease the downside risk but increase the upside risk. However, using a large panel of 1164 non-financial Australian firms from 2001 to 2013, we find that strong corporate governance relates negatively not only to downside risk but also to upside risk. These findings are robust to alternative risk-taking and corporate governance proxies and alternative sample specifications. We also show that our main results are unaffected due to endogeneity bias by using firm and industry-year fixed effects, lagged independent variables, generalized method of moments and entropy balancing estimation techniques. In additional analyses, we document that our main results are homogeneous across different industries and for firms with varying levels of boardroom gender diversity. However, we find that our main results are driven by firms with lower ownership concentration as well as by older and more mature firms. Finally, we document that while reducing risk-taking (downside and upside risk), corporate governance reduces firm value. From a regulatory perspective, these findings raise questions on the design of monitoring-focused corporate governance recommendations and have implications for risk management.

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