Corporate Governance, Firm Performance and Firm Risk-Taking around the Financial Crisis

Abstract

The accounting scandals of Enron and others inspired governments and stock exchanges to update their corporate governance laws, requirements and rules. However, these changes were not implemented before the most recent financial crisis or they were not effective. Because of this, the failures of corporate governance and inefficient risk management have been blamed for the financial crisis. Already before the accounting scandals and the crisis academics have researched the connections between corporate governance and firm performance, and firm risk-taking. The findings of prior studies vary depending on the applied variables and time periods.

The purpose of this thesis is to examine the association between corporate governance and firm performance, and firm risk-taking. The study uses data on non-financial S&P 500 firms from 2004 to 2009. The sample period is divided into pre-crisis period of 2004–2006 and crisis period of 2007–2009. Firm performance is measured with buy-and-hold return and return on asset, and firm risk-taking is measured by leverage and Altman’s (1968) Z-score. Corporate governance, on the other hand, is measured by an overall governance index, the Corporate Governance Quotient (CGQ), and variables for board independency, board structure, board size, busyness of the CEO, and CEO duality.

The findings show that the CGQ is inversely related to performance in both time periods, suggesting that good governance is connected to poor performance. In 2004–2006 board structure is shown to improve performance, and in 2007–2009 board independency is inversely related to performance. The results also show that before the crisis, board structure and a busy CEO increase firm risk-taking, and that CEO duality benefits the firms with less risk-taking. After the crisis good corporate governance increases firm risk-taking, and a busy CEO and board size decrease risk-taking. Based on the results, two research hypotheses are accepted, while one is rejected.