Corporate Risk-Taking, Foreign Institutional Ownership and the Role of Macro Corporate Governance
49 Pages Posted: 11 Mar 2014 Last revised: 7 Jan 2018
Date Written: May 1, 2016
Abstract
Using a large sample of 48,548 firms from 72 countries, we document a positive impact of foreign institutional ownership on corporate risk-taking. Further, foreign institutional ownership is found to be a substitute for macro corporate governance in determining corporate risk-taking. It supports the view that foreign institutional investors play stronger roles in motivating managers to take risks in countries with weaker corporate governance. In addition, we find foreign strategic investment ownership (i.e., with a disclosed holding above 5 percent of total number of shares outstanding) reduces the potential negative-side effect of corporate risk-taking, namely, stock price crash risk. Various robustness tests and careful considerations of endogeneity confirm our main conclusions.
Keywords: foreign institutional ownership, corporate risk-taking, macro corporate governance, stock price crash risk
JEL Classification: G32, G34
Suggested Citation: Suggested Citation