Organization Capital and Firm Risks

30 Pages Posted: 7 Sep 2023

Date Written: September 1, 2023

Abstract

Purpose
This paper aims to investigate how organization capital influences different forms of corporate risk. It also explores how the relationship between organization capital and risks varies in the cross-section of firms.

Design/methodology/approach
To test the hypothesis, this study employs the ordinary least squares (OLS) regression model using a large sample of the United States (US) data over the 1981–2019 period. It also uses an instrumental variable approach and an errors-in-variables panel regression approach to mitigate endogeneity problems.

Findings
The empirical results show that organization capital is positively related to both idiosyncratic risk and total risk but negatively related to systematic risk. The cross-sectional analysis shows that the positive relationship between organization capital and idiosyncratic risk is significantly more pronounced for the subsample of firms with high information asymmetry and human capital. Moreover, the negative relationship between organization capital and systematic risk is significantly more pronounced for firms with greater efficiency and firms facing higher industry- and economy-wide risks.

Practical implications
The findings have important implications for investors and policymakers. For example, since organization capital increases idiosyncratic risk and total risk but reduces systematic risk, investors should take organization capital into account in portfolio formation and risk management. Moreover, the findings lend support to the argument on the recognition of intangible assets in financial statements. In particular, the study suggests that standard-setting bodies should consider corporate reporting frameworks to incorporate the disclosure of intangible assets into financial statements, particularly given the recent surge of corporate intangible assets and their critical impact on corporate risks.

Originality/value
To the best of the authors' knowledge, this is the first study to adopt a large sample to provide systematic evidence on the relationship between organization capital and a wide range of risks at the firm level. The authors show that the effect of organization capital on firm risks differs remarkably depending on the kind of firm risk a particular risk measure captures. This study thus makes an original contribution to resolving competing views on the effect of organization capital on firm risks.

Keywords: Organization capital, Corporate risks, Agency problems

Suggested Citation

Hasan, Mostafa Monzur and Cheung, Adrian, Organization Capital and Firm Risks (September 1, 2023). China Accounting & Finance Review, Vol. 25, No. 3, 2023, Available at SSRN: https://ssrn.com/abstract=4537150

Mostafa Monzur Hasan (Contact Author)

Macquarie University ( email )

Level 3, Building 4ER,
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/mostafa-hasan

Adrian Cheung

City University of Macau ( email )

Avenida Padre Tomas Pereira
Taipa
Macau
China
+85385902984 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
54
Abstract Views
243
Rank
694,198
PlumX Metrics