Board composition and corporate risk-taking: a review of listed firms from Germany and the USA

Abstract

Purpose

Corporate governance is a crucial factor when considering excessive corporate risk-taking. Since corporate boards play such an important role in corporate governance, the purpose of this paper is to empirically examine the impact of board composition and further board characteristics on excessive corporate risk-taking.

Design/methodology/approach

This study investigates listed firms from Germany and the USA from 2004 to 2015 based on data from Thomson Reuters Data Stream. The authors apply the fixed effect and random effect estimation method to demonstrate the impact of board composition on corporate risk-taking.

Findings

This study provides empirical evidence that an increase in the proportion of independent directors is associated with less corporate risk-taking. These effects are stronger among German firms. Lastly, the effects of board size and audit committee effectiveness (AUCE) on risk-taking have mixed results.

Research limitations/implications

The results favor continued efforts to strengthen the composition of corporate boards and improve the effectiveness of audit committees to curb unhealthy corporate risk-taking. The recommendations from the research will provide regulators and corporate management with the necessary information needed to design an appropriate independent board structure, and board size (BOSI). The research will, furthermore, fortify the indispensability of financial experts on audit committees.

Originality/value

This study contributes to the agency theory debate with these findings. Stronger board independence enables a better monitoring of the CEO, which leads to decision making based on a more appropriate level of risk.

Citation

Younas, Z.I., Klein, C., Trabert, T. and Zwergel, B. (2019), "Board composition and corporate risk-taking: a review of listed firms from Germany and the USA", Journal of Applied Accounting Research, Vol. 20 No. 4, pp. 526-542. https://doi.org/10.1108/JAAR-01-2018-0014