Corporate Governance Reform and Risk-Taking: Evidence from a Natural Experiment in an Emerging Market

Abstract

Empirical evidence from developed markets suggests a negative effect of corporate governance reform (CGR) on corporate risk-taking primarily due to higher compliance costs. We revisit this relation in an emerging market categorized by weaker market forces of corporate control and higher likelihood of expropriation by dominant insiders. Contrary to the evidence from developed markets, we find CGR leads to higher corporate risk-taking. Our study shows risk-taking is an important channel through which CGR can add to higher firm-valuation. The results of our study support the view that stricter CGR enforcement can have a positive investment impact in evolving regulatory environment.

Keywords: corporate governance reform, risk-taking, emerging market, natural-experiment.

JEL Classification: G32, G34, G38