Foreign institutional ownership and corporate risk‐taking: International evidence

Abstract

Research Question/Issue This study aims to investigate the role of foreign institutional investors (FIIs) on corporate risk‐taking in an international context. We conjecture that FIIs play a role in encouraging firms to take risks and can substitute country‐level corporate governance in determining corporate risk‐taking. Research Findings/Insights Employing a large sample of 17,698 firms across 42 economies, we show that foreign institutional ownership positively influences corporate risk‐taking. This positive relation is achieved through the monitoring channel and the insurance channel. Furthermore, we show that FIIs substitute country‐level corporate governance in determining corporate risk‐taking, indicating that FIIs play a significant role in promoting risk‐taking in economies with weaker governance. In addition, debtholders view FIIs' risk‐promoting role negatively and use more restrictive covenants to protect themselves. Theoretical/Academic Implications This study provides empirical support for the role of FIIs on corporate investment decisions, thus complementing the existing literature. In addition, our paper documents that country‐level corporate governance and FIIs are substitutes in determining corporate risk‐taking, thus shedding additional light not only on the role of country‐level corporate governance but also on its controversial joint role with FIIs. Practitioner/Policy Implications FIIs from economies with stronger corporate governance are particularly effective at promoting corporate risk‐taking in economies with weaker corporate governance, providing a new channel through which foreign investments can influence economic growth in developing economies. Therefore, policymakers should carefully consider and trade off the costs and benefits of foreign investment when proposing relevant policies.

Is there a mediating role of corporate social responsibility between board independence, board diversity, and dividend payouts decision?

“…Consistent with Huang et al (2023), the study used the Hausman test and Breusch Pagan test to test for the endogeneity and heterogeneity in the data. The Hausman test informs about the usage of fixed effects or random effects.…”

Tax incentives, common institutional ownership, and corporate ESG performance

“…Common institutional ownership refers to institutional investors simultaneously holding stocks in two or more companies within the same industry (Wang et al, 2023). Current academic discussions on this topic primarily revolve around collusion fraud and collaborative governance (Yao et al, 2023).…”

Stewardship regulation and institutional investors' preference for investee governance quality

“…Alternatively, institutional shareholders who adopt the Code adopters may be indifferent to investee governance arrangements due to their increased engagement and monitoring efforts. Their stewardship activity may substitute for internal governance (Rediker and Seth, 1995;Ward et al, 2009;Arcot and Bruno, 2018;Huang et al, 2022), resulting in no increased preference for governance quality. Another possibility is that institutional investors adopt the Code merely as a symbolic gesture, particularly if it is implemented on a comply-orexplain basis (MacNeil and Li, 2006).…”

“…Their stewardship activity may substitute for internal governance (Rediker and Seth, 1995; Ward et al. , 2009; Arcot and Bruno, 2018; Huang et al. , 2022), resulting in no increased preference for governance quality.…”