The Impact of Mandatory Governance Changes on Financial Risk Management

54 Pages Posted: 5 Feb 2018  

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Elaine Hutson

Monash University - Dept of Banking and Finance; Financial Research Network (FIRN)

Elaine Laing

Trinity Business School

Date Written: February 2018

Abstract

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

Hege, Ulrich and Hutson, Elaine and Laing, Elaine, The Impact of Mandatory Governance Changes on Financial Risk Management (February 2018). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 552/2018. Available at SSRN: https://ssrn.com/abstract=3117801 or http://dx.doi.org/10.2139/ssrn.3117801

Ulrich Hege (Contact Author)

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Elaine Hutson

Monash University - Dept of Banking and Finance ( email )

PO Box 197
Caulfield East, Victoria 3145
Australia
+61399032110 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Elaine Laing

Trinity Business School ( email )

Trinity College Dublin
Dublin, 2
Ireland

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