The Governance of Risk Management: The Importance of Directors’ Independence and Financial Knowledge
Risk Management and Insurance Review 22, 247-277, 2019
79 Pages Posted: 5 Jun 2019 Last revised: 9 Jan 2023
Date Written: January 4, 2018
This paper tests the effects of the independence and ﬁnancial knowledge of directors on risk management and ﬁrm value in the gold mining industry. Our original hand-collected database on directors’ ﬁnancial education, accounting background, and ﬁnancial experience allows us to test the effect of each dimension of ﬁnancial knowledge on risk management activities. We show that directors’ ﬁnancial knowledge increases ﬁrm value through the risk management channel. This effect is strengthened by the independence of the directors on the board and on the audit committee. Extending the dimension of education, we show that, following unexpected shocks to gold prices, educated hedgers are more effective than average hedgers in the industry. As a policy implication, our results suggest adding the experience and education dimensions to the 2002 Sarbanes–Oxley Act and New York Stock Exchange requirements for ﬁnancial literacy.
Keywords: risk management governance, ﬁnancial knowledge, ﬁnancial and accounting education of director, ﬁnancial experience of director, independence of director, policy implications
JEL Classification: D83, G18, G30, G32, G34, G38
Suggested Citation: Suggested Citation