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The purpose of this paper is to investigate the effect of corporate governance strength as measured by the Gompers governance index (gindex) and other related factors on…
The purpose of this paper is to investigate the effect of corporate governance strength as measured by the Gompers governance index (gindex) and other related factors on corporate risk as measured by implied volatility of returns.
The research incorporates implied volatility as the measure of risk, as compared to earlier studies that have used historic volatility measures. Governance variables include the Gompers Index, as well as other measures to control for firm size, ownership and leverage.
The findings indicate that corporate risk is significantly inversely‐related with the gindex, which essentially gauges how extensively antitakeover provisions are adopted by a firm. Firm size is the other variable significant in both univariate and multivariate models. Financial leverage and the percentage of outsiders on the board are significantly related to firm risk when not controlling for other factors. Board percentage of voting power does not appear to affect firm riskiness statistically.
Future research needs to examine specifically why higher takeover defenses lead to lower implied volatility. This includes exploring whether the lower level of expected volatility is due to lower levels of takeover activity or whether firms with poor governance assume a suboptimal amount of risk.
The paper contributes to the literature by the use of implied volatility as the measure of risk. The results are robust and provide further support for the relationship between corporate governance and risk. While counter to initial expectations, these results suggest, at the very least, a firm with good governance may not necessarily have low implied volatility in its stock price.
Directors play a hard-to-quantify but critical role in the success of corporations. Outside directors supplement the firm-specific knowledge of inside directors by providing expertise and monitoring. Prior research finds that outside directors who are commercial bankers can be both beneficial and costly to large, non-financial corporations. Smaller, bank-dependent corporations should benefit more than large firms from the services banker directors provide, but may also be more prone to the costs they can impose. The purpose of this paper is to investigate the influence of bank dependency on appointments of banker directors.
The author estimates models relating the probability of a first-time banker-director appointment to proxies of bank dependency on data for a matched sample of firms with and without banker directors drawn from a size-representative sample of Compustat firms.
Bank-dependent firms are less likely to appoint bankers as directors than bank-independent firms. Bank-dependent firms are also less likely to appoint bankers whose employers are firms’ creditors (i.e. affiliated bankers). Bank-dependent and bank-independent firms are indistinguishable in their probabilities of appointing unaffiliated bankers as directors.
Bank-dependent firms with unexploited growth opportunities appear unable to ameliorate their financial constraints by having banker directors. Appointing retired bankers to boards may give firms the benefits of banker directors without the costs.
This paper is the first to: document the prevalence of banker directors at smaller corporations; present econometric evidence on banker-director appointments at firms ranging from small to large; and identify bank dependency as a factor limiting appointments of affiliated banker directors.