Does Corporate Governance Have a Differential Effect on Downside and Upside Risk?

Ali, S., Liu, B., Su, J.J., (2022). Does Corporate Governance Have a Differential Effect on Downside and Upside Risk? Journal of Business Finance and Accounting, forthcoming

Posted: 22 May 2016 Last revised: 4 Mar 2022

See all articles by Searat Ali

Searat Ali

University of Wollongong; University of Wollongong - School of Accounting, Economics & Finance

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics

J.J. Su

Griffith University

Date Written: March 2, 2022

Abstract

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 1,164 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 to 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.

Keywords: Corporate governance, risk taking, upside risk, downside risk, differential effect

JEL Classification: G01, G33, G34, G38

Suggested Citation

Ali, Searat and Ali, Searat and Liu, Benjamin and Su, J.J., Does Corporate Governance Have a Differential Effect on Downside and Upside Risk? (March 2, 2022). Ali, S., Liu, B., Su, J.J., (2022). Does Corporate Governance Have a Differential Effect on Downside and Upside Risk? Journal of Business Finance and Accounting, forthcoming, Available at SSRN: https://ssrn.com/abstract=2780036

Searat Ali (Contact Author)

University of Wollongong ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia
+61242392211 (Phone)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia
+61242392211 (Phone)

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

J.J. Su

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

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