Risk Taking Behavior, Corporate Governance and Product Market Competition: Evidence From Pakistan

Naveed Anjum


This research aims to analyze the association of corporate governance and risk-taking behaviour with an interplay of product market competition. This paper covers the major aspects of corporate governance i.e. audit quality, board composition and ownership structure. Whereas, the risk-taking behavior and product market competition are measured through idiosyncratic risk and Herfindahl Hirschman Index respectively. Our study is based on secondary data of 281 Pakistan Stock Exchange (PSX) listed non-financial firms from 2011 to 2016. Consistent with agency theory, the results reveal that risk-taking behaviour is significantly affected by corporate governance. Moreover, product market competition moderates the relationship between corporate governance and risk-taking behavior.

Key Words: Corporate Governance; Risk Taking; Product Market Competition; Idiosyncratic Risk; Herfindahl Hirschman Index

Full Text:



Abdoh, H. A. A., & Varela, O. (2018). Product market competition, cash flow and corporate investments. Managerial Finance, 44(2), 207-221.

Alam, A., & Shah, S. Z. (2012). Corporate governance and its impact on firm risk.

Albuquerue, R., & Wang, N. (2008). Agency conflicts, investment, and asset pricing. the Journal of Finance, 63(1), 1-40.

Amihud, Y., & Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. The Bell Journal of Economics, 605-617.

Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2003). Founding family ownership and the agency cost of debt. Journal of financial economics, 68(2), 263-285.

Anderson, R. C., Reeb, D. M., Upadhyay, A., & Zhao, W. (2011). The economics of director heterogeneity. Financial Management, 40(1), 5-38.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58(2), 277-297.

Baggs, J., & De Bettignies, J. E. (2007). Product market competition and agency costs. The Journal of Industrial Economics, 55(2), 289-323.

Balakrishnan, K., & Cohen, D. (2011). Product market competition and financial accounting misreporting University of Pennsylvania Working paper: Citeseer.

Bhojraj, S., & Sengupta, P. (2003). Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. The journal of Business, 76(3), 455-475.

Chen, H.-M., Lin, C.-H., Kao, T.-C., & Wei, T.-J. (2016). The Effects of Corporate Governance on Idiosyncratic Risk: Evidence from Financial Institutions in Taiwan. Journal of Finance and Bank Management, 4(2), 17-24.

Chen, K. C., Chen, Z., & Wei, K. J. (2011). Agency costs of free cash flow and the effect of shareholder rights on the implied cost of equity capital. Journal of financial and quantitative analysis, 46(1), 171-207.

Cheng, P., Man, P., & Yi, C. H. (2013). The impact of product market competition on earnings quality. Accounting & finance, 53(1), 137-162.

Cheng, S. (2008). Board size and the variability of corporate performance. Journal of financial economics, 87(1), 157-176.

Chhaochharia, V., Grullon, G., Grinstein, Y., & Michaely, R. (2009). Product market competition and agency conflicts: Evidence from the Sarbanes Oxley Law. Johnson School Research Paper Series(18-2012).

Chun, S. E., Nagano, M., & Lee, M. H. (2011). Ownership Structure and Risk‐taking Behavior: Evidence from Banks in Korea and Japan. Asian Economic Journal, 25(2), 151-175.

Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does one size fit all? Journal of financial economics, 87(2), 329-356.

Core, J. E., Guay, W. R., & Rusticus, T. O. (2006). Does weak governance cause weak stock returns? An examination of firm operating performance and investors' expectations. the Journal of Finance, 61(2), 655-687.

Cremers, K. M., & Nair, V. B. (2005). Governance mechanisms and equity prices. the Journal of Finance, 60(6), 2859-2894.

Dasilas, A., & Papasyriopoulos, N. (2015). Corporate governance, credit ratings and the capital structure of Greek SME and large listed firms. Small Business Economics, 45(1), 215-244.

DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of accounting and economics, 3(3), 183-199.

Demsetz, H., & Villalonga, B. (2001). Ownership structure and corporate performance. Journal of corporate Finance, 7(3), 209-233.

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of corporate Finance, 18(2), 389-411.

Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of political economy, 88(2), 288-307.

Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The Journal of Law and Economics, 26(2), 327-349.

Feltham, G. A., Hughes, J. S., & Simunic, D. A. (1991). Empirical assessment of the impact of auditor quality on the valuation of new issues. Journal of accounting and economics, 14(4), 375-399.

Gadhoum, Y., & Ayadi, M. A. (2003). Ownership structure and risk: A Canadian empirical analysis. Quarterly Journal of Business and Economics, 19-39.

Giroud, X., & Mueller, H. M. (2011). Corporate governance, product market competition, and equity prices. the Journal of Finance, 66(2), 563-600.

Gomes, A. (2000). Going public without governance: managerial reputation effects. the Journal of Finance, 55(2), 615-646.

Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. The quarterly journal of economics, 118(1), 107-156.

Gul, F. A., Kim, J.-B., & Qiu, A. A. (2010). Ownership concentration, foreign shareholding, audit quality, and stock price synchronicity: Evidence from China. Journal of financial economics, 95(3), 425-442.

Haider, J., & Fang, H.-X. (2016). Board size and corporate risk: evidence from China. Journal of Asia-Pacific Business, 17(3), 229-248.

Hamao, Y., Mei, J., & Xu, Y. (2003). Idiosyncratic risk and the creative destruction in Japan: National Bureau of Economic Research.

Hart, O. D. (1983). The market mechanism as an incentive scheme. The Bell Journal of Economics, 366-382.

Haw, I.-M., Ho, S. S., Hu, B., & Wu, D. (2010). Concentrated control, institutions, and banking sector: An international study. Journal of Banking & Finance, 34(3), 485-497.

Hirshleifer, D., & Thakor, A. V. (1992). Managerial conservatism, project choice, and debt. The Review of Financial Studies, 5(3), 437-470.

Czarnitzki, D., & Kraft, K. (2009). Capital control, debt financing and innovative activity. Journal of Economic Behavior & Organization, 71(2), 372-383.

Hsu, H.-H., & Wu, C. Y.-H. (2014). Board composition, grey directors and corporate failure in the UK. The British Accounting Review, 46(3), 215-227.

Hussain, S., & Shah, A. (2017). Corporate governance and downside systematic risk with a moderating role of socio-political in Pakistan. Business & Economic Review, 9(4), 28-60.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.

Jin, L., & Myers, S. C. (2006). R2 around the world: New theory and new tests. Journal of financial economics, 79(2), 257-292.

John, K., Litov, L., & Yeung, B. (2008). Corporate governance and risk‐taking. the Journal of Finance, 63(4), 1679-1728.

Kamran, K., & Shah, A. (2014). The impact of corporate governance and ownership structure on earnings management practices: Evidence from listed companies in Pakistan.

Kitching, K. (2009). Audit value and charitable organizations. Journal of Accounting and public Policy, 28(6), 510-524.

Koerniadi, H., Krishnamurti, C., & Tourani-Rad, A. (2014). Corporate governance and risk-taking in New Zealand. Australian Journal of management, 39(2), 227-245.

L. Hoelscher, J., & E. Seavey, S. (2014). Auditor industry specialization and corporate risk-taking. Managerial Auditing Journal, 29(7), 596-620.

Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of financial economics, 93(2), 259-275.

Laksmana, I., Tietz, W., & Yang, Y.-W. (2012). Compensation discussion and analysis (CD&A): Readability and management obfuscation. Journal of Accounting and public Policy, 31(2), 185-203.

Laksmana, I., & Yang, Y.-w. (2015). Product market competition and corporate investment decisions. Review of Accounting and Finance, 14(2), 128-148.

Lemmon, M. L., & Lins, K. V. (2003). Ownership structure, corporate governance, and firm value: Evidence from the East Asian financial crisis. the Journal of Finance, 58(4), 1445-1468.

Lin, W.-C., & Chang, S.-C. (2012). Corporate governance and the stock market reaction to new product announcements. Review of Quantitative Finance and Accounting, 39(2), 273-291.

Linck, J. S., Netter, J. M., & Yang, T. (2008). The determinants of board structure. Journal of financial economics, 87(2), 308-328.

Low, A. (2009). Managerial risk-taking behavior and equity-based compensation. Journal of financial economics, 92(3), 470-490.

Marciukaityte, D., & Park, J. C. (2009). Market competition and earnings management. Available at SSRN 1361905.

Masulis, R. W., Wang, C., & Xie, F. (2007). Corporate governance and acquirer returns. the Journal of Finance, 62(4), 1851-1889.

May, D. O. (1995). Do managerial motives influence firm risk reduction strategies? the Journal of Finance, 50(4), 1291-1308.

Meyer, M. A., & Vickers, J. (1997). Performance comparisons and dynamic incentives. Journal of political economy, 105(3), 547-581.

Mitton, T. (2002). A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis. Journal of financial economics, 64(2), 215-241.

Nakano, M., & Nguyen, P. (2012). Board Size and Corporate Risk Taking: Further Evidence from J apan. Corporate Governance: An International Review, 20(4), 369-387.

Nguyen, B. D. (2011). Ownership structure and board characteristics as determinants of CEO turnover in French-listed companies. Finance, 32(2), 53-89.

Parrino, R., Poteshman, A. M., & Weisbach, M. S. (2005). Measuring investment distortions when risk‐averse managers decide whether to undertake risky projects. Financial Management, 34(1), 21-60.

Porta, R. L., Lakonishok, J., Shleifer, A., & Vishny, R. (1997). Good news for value stocks: Further evidence on market efficiency. the Journal of Finance, 52(2), 859-874.

Reichelt, K. J., & Wang, D. (2010). National and office‐specific measures of auditor industry expertise and effects on audit quality. Journal of Accounting Research, 48(3), 647-686.

Saeed, A., & Sameer, M. (2017). Impact of board gender diversity on dividend payments: Evidence from some emerging economies. International Business Review, 26(6), 1100-1113.

Sah, R. K., & Stiglitz, J. E. (1986). The architecture of economic systems: Hierarchies and polyarchies. The American Economic Review, 716-727.

Saito, T. (2008). Family firms and firm performance: Evidence from Japan. Journal of the Japanese and International Economies, 22(4), 620-646.

Scharfstein, D. (1988). Product-market competition and managerial slack. The RAND Journal of Economics, 147-155.

Schmidt, K. M. (1997). Managerial incentives and product market competition. The review of economic studies, 64(2), 191-213.

Shehzad, C. T., de Haan, J., & Scholtens, B. (2010). The impact of bank ownership concentration on impaired loans and capital adequacy. Journal of Banking & Finance, 34(2), 399-408.

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. the Journal of Finance, 52(2), 737-783.

Titman, S., & Trueman, B. (1986). Information quality and the valuation of new issues. Journal of accounting and economics, 8(2), 159-172.

Tufano, P. (1996). Who manages risk? An empirical examination of risk management practices in the gold mining industry. the Journal of Finance, 51(4), 1097-1137.

Upadhyay, A., & Zeng, H. (2014). Gender and ethnic diversity on boards and corporate information environment. Journal of Business Research, 67(11), 2456-2463.

Waheed, A., & Malik, Q. A. (2019). Board characteristics, ownership concentration and firms’ performance: A contingent theoretical based approach. South Asian Journal of Business Studies, 8(2), 146-165.

Wallach, M. A., & Kogan, N. (1964). Risk taking: A study in cognition and personality. New York: Holt, Rinehart and Winstor.

Weinstein, D. E., & Yafeh, Y. (1998). On the costs of a bank‐centered financial system: Evidence from the changing main bank relations in Japan. the Journal of Finance, 53(2), 635-672.

Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of financial economics, 105(3), 581-606.

Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does one size fit all?. Journal of financial economics, 87(2), 329-356.


  • There are currently no refbacks.