Mandatory Governance Reform and Corporate Risk Management
64 Pages Posted: 5 Feb 2018 Last revised: 7 Apr 2021
Date Written: March 23, 2021
Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.
Keywords: risk management, financial hedging, operational hedging, foreign exchange risk, Sarbanes-Oxley Act, corporate governance reform, board monitoring, risk-taking incentives
JEL Classification: F31, F23, G34
Suggested Citation: Suggested Citation