Mandatory Governance Reform and Corporate Risk Management

64 Pages Posted: 5 Feb 2018 Last revised: 7 Apr 2021

See all articles by Ulrich Hege

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: 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

Hege, Ulrich and Hutson, Elaine and Laing, Elaine, Mandatory Governance Reform and Corporate Risk Management (March 23, 2021). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 552/2018, Journal of Corporate Finance, Forthcoming, Available at SSRN: or

Ulrich Hege (Contact Author)

Toulouse School of Economics ( email )

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

HOME PAGE: http://

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

HOME PAGE: http:/

Elaine Hutson

Monash University - Dept of Banking and Finance ( email )

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

Financial Research Network (FIRN)

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


Elaine Laing

Trinity Business School ( email )

Trinity College Dublin
Dublin, 2

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