Corporate Governance and Risk-Taking: Evidence from Japanese Firms

Abstract

This paper evaluates the influence of corporate governance on the risk taking of Japanese firms. We find that family control and ownership concentration are associated with higher idiosyncratic risk, whereas bank control has the opposite consequence. Considering the link between idiosyncratic risk and firm performance, the results provide a rationale for the higher (lower) performance of family-controlled firms (bank-controlled firms). The results also explain the higher performance of firms with concentrated ownership by relating their governance structures to the risk-taking strategies that are associated with greater competitive advantages. Finally, we show that the impact of governance structures on risk taking is stronger after controlling for endogeneity.

Keywords: corporate governance, family firms, bank control, idiosyncratic risk, firm performance

JEL Classification: G30