The Impact of Mandatory Governance Changes on Financial Risk Management
54 Pages Posted: 5 Feb 2018
Date Written: February 2018
This paper uses the staggered adoption of the Sarbanes-Oxley Act of 2002 for a difference-in-difference identification of the impact of corporate governance on hedging. In a large panel of listed US firms, we focus on two indexes of the legally required governance reforms, but also a wide index of governance quality. We find that the substantial improvements in governance standards robustly lead to less foreign exchange exposure and more foreign exchange derivatives hedging, and that the economic magnitude of the effect is large. Also, the adoption of mandatory governance measures is a stronger predictor of hedging than voluntary improvements. Dynamic panel GMM estimates confirm a significant positive relationship between governance quality and hedging.
Keywords: hedging, foreign exchange exposure, Sarbanes-Oxley Act, corporate governance, board monitoring, staggered introduction
JEL Classification: F31, F23, G34
Suggested Citation: Suggested Citation