The influence of equity ownership in corporate risk-taking for
globally diversified corporations
Student number: s3420345 Name: Lydia Aslanoglou
Study Program: MSc IFM, Faculty of Business and Economics, University of Groningen Supervisor: Adri De Ridder
-Abstract-
Table of Contents
1. Introduction………....….……..………...4
2. Literature review and hypothesis development…………..………..…………....…....6
2.1 Summary of prior studies………..……..…...…..…….8
2.2 Hypothesis development………....………….………..………8
2.2.1 Risk-taking, ownership………..……..…..…….8
2.2.2 Risk-taking, ownership, investor protection………..…………..……9
2.2.3 Risk-taking, ownership and global diversification...………..……….…..10
3. Data and methodology…… ……….………..…...……….11
1. Introduction
In recent years, equity ownership by institutions has become a major national political and economic issue in society. The constant rise of ownership concentration of large shareholders (more than 10%), (Paligorova, 2010), and its implications in the economy, has drawn the researchers’ attention. Several studies tried to comprehend in depth with this issue as large shareholders obtain a substantial position as investors in the whole economy, while their impact in corporation’s decisions is even more important as they hold the majority of firms’ stakes (Paligorova, 2010). These reasons are generally supported from several authors, for instance, ownership structure defined by Vroom and McCann (2009) as the relative amount of equity ownership claims bought and held by inside investors (i.e. the managers) and outside investors (i.e. shareholders who have no direct relationship with the management of the firm). However, the sudden concern of large shareholders stake doesn’t constitute just a political or ideological issue but more of a theoretical and empirical issue. First of all, it is the main factor that enables firms to diversify their investments against various risks (Jensen and Meckling, 1976). Large shareholders control the benefits of their firms. This relationship between managers and shareholders has been studied extensively by several authors in order to explain the reasons for the creation of conflicts of interest and deal with the problem of agency theory (Denis et al., 1999). Therefore, as agency theory implies, in order to maximize their profits, large shareholders attempt to control and monitor managers (Amihud and Lev, 1981). Because of this concentration of incentives in their private benefits, large shareholders’ behavior regarding risk decisions is differentiated according to their costs and benefits (John et al., 2008). More specifically, Beslerova (2013) states that managers are more risk-averse and as far their interests are in conflict with those of the shareholders, problems created that reduce the value and the wealth of the firm. Holderness (2009) argue that the best strategy for minimizing such conflict and improving the firm’s value is an increased equity ownership structure. Finally, the market and the legal system determine the distribution of returns to these risks through the establishment of equity ownership concentration in the large shareholders.
organizational life of firms and can provide different benefits (Jensen and Meckling, 1976), as an organization’s risk taking policy depicts risk behavior of that firm (Almuqren et al., 2017). In addition, a direct contingency of ownership and risk-taking exists and need further valid empirical evidence in order to determine this relation. More specifically, depending on how control is distributed across different types of shareholders, who are characterized by different incentives and the degree of risk aversion, ownership concentration is expected to affect corporate risk taking decisions in a great extent (Boubakri et al., 2013). The effects of large shareholders’ concentration of ownership on corporate risk-taking is quite an interesting issue, especially because it received limited attention in previous literature, unlike managerial ownership (Denis et al., 1999).
Adding to this relationship a moderator such as investor protection, and observe the evidence through different types of firms’ sectors among different countries and different legal systems could lead to complete new and significant results. First of all, Jensen and Meckling (1976) state in their research that the different legal systems across countries could limit the agency problems. Second, the firm’s external environment, such as political institutions, leads to different risk-behavior across firms (Tan, 2001; John et al., 2008). Finally, Roe (2003) also pointed out the important influence of political institutions in the level of equity ownership concentration.
Does large shareholders’ ownership concentration affects risk taking decisions in a multinational environment?
This paper contributes to the literature by an examination of the relationship between risk-taking decisions and equity ownership of large shareholders in a sample of 1057 firms, from 10 different European countries and from three different sectors (manufacturing, construction and mining) during a time period of 2007 to 2014. I find the existence of an influencing relationship between risk-taking decisions and large shareholders’ ownership of the firm, still with contradict results. In other words, results show that higher investor protection drives in riskier decisions the firm, while weak investor protection companies are more conservative regarding risk decisions. Moreover, this study reveals that firms in civil law countries, that are driven by roman law, (Belgium, Denmark, France, Germany, Greece, Italy, Netherlands, Sweden) are more conservative regarding risk-behavior while firms in common law countries, that are driven by English law, (United Kingdom, Ireland) adopt a more risky behavior.
The remainder of the paper is organized as follows. Section 2 provides additional discussion for the conceptual background and hypothesis, while Section 3 provides data details, construction of the sample and methodology. Additionally, section 4 discusses the analysis and results. Finally, in section 5, the conclusions are presented.
2. Literature review and hypothesis development
Corporations consider the risk management as a very serious and important issue. Recent surveys reveal that risk does play a key role in achieving organizations’ objectives (Froot et al., 1993). The improvement in utilization of assets, profitability of firm and its growth depend on corporate risk taking according to Jensen and Meckling (1976).
that shareholders with significant equity ownership concentration can change the basis of corporate risk-taking of firm, which imply a great influence in firm’s wealth and survival. Agency theory link these factors, large shareholders’ stake and risk taking, and prescribe the way in which one influences the other. Large shareholders’ attempt to control and protect their benefits, provides them stronger incentives to monitor managers’ behavior in order to ensure their profits (Shleifer and Vishny, 1986). Shareholders’ main concern, the maximization of their benefits, could drive them in contradicted actions concerning risk-taking policy. More specifically, as long as shareholders’ share in equity ownership concentration increases, they have more incentives to engage in more risky actions because they own a greater portfolio so they have less fear in case of a failure (Paligorova, 2009). From the opposite point of view, shareholders’ benefits from equity ownership concentration are rather important. Therefore, they might drive them to a more conservative policy and risk averse behavior (Paligorova,2010). According to these arguments, the relationship between large shareholders stake and risk-taking decisions is still unclear and depends on the shareholders’ motives (Paligorova, 2010)
In addition, as mentioned above, the focus of this paper is extended to legal systems’ differentiation and its impact on the aforementioned relationship between risk-taking and large shareholders’ ownership concentration. Several previous studies deal with the explanation of the relation between corporate risk-taking and countries’ legal systems. According to Delios and Henisz (2000, 2003), nowadays the majority of enterprises tend to invest in more risky management decisions. Hence, corporations take into account several factors in the country in which they plan to invest. A main such factor constitutes the legal system of each country. Generally, there is a great number of variables that influence risk taking decisions in both civil law and common law countries. Indeed, the less corrupted markets create an environment with more favorable institutional context which positively affects the firm’s value (Levy and Spiller, 1994) and consequently the expansion decisions and the level of risk the company decides to take.
incentives and thus firm growth (Boubakri et al., 2013). Specifically, Jensen and Meckling (1976) recognize that the legal environment influence the above mentioned relationship and could limit agency theory problems.John et al. (2008) conclude that better investor protection leads to more risky and value-enhancing investments. If we consider that strong legal protection constitutes a way so that governments control and limit private benefits of large shareholders, consequently, the degree of equity ownership structure, we could observe the vital role of investor protection on risk taking and thus on agency theory. Moreover, the difference in legal protections might also explain the different ownership structure in different countries (La Porta et al., 1998). More specifically, common law countries tend to protect investors more than civil law countries. According to La Porta et al. (1998), the magnitude of investor protection affect in a different way the concentration of ownership in various countries, which affects indirectly corporation’s risk taking decisions too. As a result, we assume investor protection as a considerable factor in corporate risk-taking decisions.
2.1 Summary of prior studies
2.2 Hypothesis development
2.2.1 Risk-taking, ownership
As already mentioned large shareholders’ ownership concentration does have an impact on corporate risk-taking according to several authors, such as Amihud and Lev (1981), May (1995), Boubakri et al. (2013). The relationship between corporate risk-taking and shareholders’ ownership concentration is still subject of great debate as several studies support the view that ownership concentration decreases corporate risk-taking (Tufano, 1996) while others support the exact opposite (Paligrova, 2009). Agency theory tries to explain the relationship between risk-taking decisions and shareholders’ ownership concentration especially in the financial sector. The theory of Paligorova (2010) indicates that managers are more risk-averse than shareholders because of the latest’s ability to effectively diversify their risks. This argument is also supported by Amihud and Lev (1981) and Downs et al. (1999), who claim that firms face different risks that reduce due to portfolio diversification. Firms with large shareholders are more likely to engage in more risky decisions instead of firms which controlled by risk-averse managers (Paligorova, 2010). The positive influence of large shareholders’ ownership concentration on risk-taking decisions is also supported by other papers in which risk risk-taking benefited from shareholders’ ownership concentration and volatility reduction (Li et al., 2011; Zhao and Xiao, 2016).
H1: Ownership concentration of large shareholders has a positive impact on firm’s
risk-taking decisions
2.2.2 Risk-taking, ownership, investor protection
As we examine the relationship between taking decisions and investor protection, risk-taking choices seems to be affected not only by equity shareholders and managers’ ownership power but also by their private benefits (John et al., 2008). In order to protect these benefits, large equity shareholders may be conservative in investing and decision making (John et al., 2008). More specifically, more conservative firm’s policy implies the existence of more important private benefits and hence resulting in engaging in less risky projects (Morck et al., 2005). There are several studies which argue a positive association between investor protection and corporate risk-taking while others offer justification for a negative relationship between them.
Firstly, in poor investor protection countries, corporations may have dominant insiders with large private benefits that they control, hence the fear of a high exposure lead them to be more conservative (Morck et al., 2005; Stulz, 2005). Secondly, nonequity stakeholders, such as banks and governments, may influence the investments, especially in low investor protection countries, for their own benefits (Morck and Nakamura, 1999). Additionally, corporations located in countries with better investor protection and law enforcement are more valuable, because outside investors are willing to pay more for those firms (Claessens and Laeven, 2003; Klapper and Love, 2004). On the other hand, according to previous literature, the fear of expropriation reduces when investor protection increases, therefore there is less need for ownership by dominant stakeholders (Burkart et al., 2003). La porta et al. (1998) also claim that concentration of ownership constitutes an indicator of poor investment protection, as in most countries with high standards and high investor protection, ownership is in lower levels. To conclude, the level of investor protection could affect indirectly risk taking decisions of organizations in different countries through the influence of equity ownership structure. As we see above most studies support a positive relationship between investor protection and risk-taking.
H1a: The relationship between large shareholders’ ownership concentration and
corporations’ risk-taking decisions is positive in higher investor protection companies
2.2.3 Risk-taking, ownership and global diversification
Previous studies examine the link between country political institutions and corporate risk-taking decisions. More specifically, analyzing global diversification as the distinction between civil and common law countries, allows to observe the continued and substantial economic consequences in corporations’ decisions (La Porta et al., 2007). Common law countries originated in England and characterized by extensive protection of outside investors (shareholders), while civil law countries come from Roman law (La Porta et al., 2007). The same paper indicates also that, only a few studies have provided data and evidence on the effect of different legal rules in different countries and their impact on financial patterns. However, Raghuram and Zingales (2003) present evidence that civil law countries have developed more in financial level than common law countries. Therefore they have a more favorable environment to operate and enforce more risk-taking decisions (Stulz, 2005). On the contrary, a great number of authors claim that common law countries exceed civil law countries concerning their financial decisions and development policy. An explanation provided by Roe (2006) lies on the fact that common law countries have more favorable democratic politics, thus more freely in new investments and risk. According to these arguments I construct the last hypothesis:
H2: Firms in common law countries have a more positive effect on firm’s risk-taking
decisions than firms in civil law countries
3. Data and methodology
manufacturing (923 firms), construction (57 firms) and mining (77 firms) sectors, from 10 European countries (Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Netherlands, Sweden, United Kingdom). The initial sample consists of 1,836 public listed companies. To be included in, I require access to firms consolidated balance sheets. After excluding companies with no recent financial data and Public Authorities/ States/ Governments, the sample consists of 1057 firms. The focus of my study is to examine the risk-behavior in three important industries: manufacturing, construction and mining, that together constitutes a substantial part of the global economy. The manufacturing sector constitutes the basis of many national economies and influences sustainable economic growth (Herman, 2015). Hence, manufacturing drives productivity growth, innovation and trade of the whole nation. Furthermore, it is well known that every business involves risk, with construction businesses involving the more (Bray, 2005). Therefore construction industry could provide a better understanding in risk-taking policies by corporations. In a similar situation, mining industries coexist with different types of risk, both political and exposed, affecting corporations and their development (Bray, 2005).
3.1 Multivariate analysis
In order to test the hypotheses developed in the previous section, I estimated the following multiple regressions:
𝑅𝐼𝑆𝐾𝑖 = 𝑐 + 𝑎𝑂𝑊𝑁𝑖,𝑡+ 𝛿𝐿𝑉𝑅𝐺𝑖,𝑡+ 𝛿1𝐶𝑅𝑃𝑅𝑁𝑖,𝑡+ 𝛿2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝛿3𝑇𝐿𝐷𝐵𝑇𝑖,𝑡+ 𝜀𝑖, (1)
𝑅𝐼𝑆𝐾𝑖 = 𝑐 + 𝛼1𝑂𝑊𝑁𝑖,𝑡+ 𝛽𝐼𝑁𝑉𝑃𝑅𝑇𝑖 + 𝛽1𝐼𝑁𝑉𝑃𝑅𝑇 ∗ 𝑂𝑊𝑁 + 𝛽2𝐿𝑉𝑅𝐺𝑖,𝑡+ 𝛽3𝐶𝑅𝑃𝑅𝑁𝑖,𝑡+
𝛽4𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝛽5𝑇𝐿𝐷𝐵𝑇𝑖,𝑡+ 𝜀𝑖, (2)
largest owner has less than 10% ownership, the value is coded as zero. (Paligorova, 2009). There is also a great number of different variables that could be used as control variables in both equations. LVRG is operating leverage and measured as Total Debt/Assets, SIZE control variable represents the firm’s size and calculated by ln(Total Assets), TLDBT is total debt policy (Chen and Steiner, 1999), and CRPRN, represents corporate earnings (EBITDA/Assets) (Paligorova, 2009). Concerning my moderating variable I used investor protection, INVPRT, as firm level variable in order to test the second hypothesis. For investor protection the 4 scale table of creditor protection by countries from La Porta et al. (1998) is used. The companies from the countries that are not mentioned in the “creditor protection” table by La Porta et al. (1998) are excluded.
The third model formulated as follows:
𝑅𝐼𝑆𝐾𝑖 = 𝑐 + 𝛼2𝑂𝑊𝑁𝑖,𝑡+ 𝛾𝐿𝐺𝐿𝑆𝑇𝑖+ 𝛾1𝑂𝑊𝑁 ∗ 𝐿𝐺𝐿𝑆𝑇 + 𝛾2𝐿𝑉𝑅𝐺𝑖,𝑡+ 𝛾3𝐶𝑅𝑃𝑅𝑁𝑖,𝑡+
𝛾4𝑆𝐼𝑍𝐸𝑖,𝑡+ 𝛾5𝑇𝐿𝐷𝐵𝑇𝑖,𝑡+ 𝜀𝑖. (3)
In addition to model (1) and (2), I expand the model to include the impact of global diversification and its interaction with large shareholders’ ownership concentration in concluding my predictions. The former variable is defined as LGLST, legal system, which is used as the cuntry variable, constituting an industry dummy and is measured as the number of civil and common law countries. For each common law country number 0 is written while number 1 for each civil law country. The variables in the paper are summarized in Table 1 (Appendix).
4. Results
4.1 Summary statistics
Table 2 reports the total descriptive statistics of variables’ distribution of the whole sample, with 8454 observations. Included are the mean, median, standard deviation, maximum, minimum and the number of observations. The dependent variable, RISK, has mean, median and standard deviation of -0.01, 0.02, 0.13 respectively. The median of the variable is greater than the mean so the data are skewed to the left. Taking into account large shareholders’ ownership structure, the independent variable, noticed to be skewed to the right as the mean is higher than the median with a remarkable high standard deviation which implies that equity ownership varies significantly among the sample. Table 2 reveals the existence of both large and small owners as both the maximum and the minimum level are extremely high.
In terms of firm and country level variables, the mean, median and standard deviation of the investor protection variable are 2.38, 3.00 and 1.43, respectively. These numbers mention that the majority of the sample are countries with higher investor protection. The values of the variable range from 0 in countries such as France to 4 in countries such as United Kingdom. The results further indicate that the sample also contains more firms in countries with civil law legal system than firms in common law countries.
Table 2: Descriptive statistics of the distribution of the variables
Descriptive
Statistics Mean Median Std. Dev. Maximum
Minimu m Observation s RISK (%) -0.01 0.02 0.13 0.13 -0.42 8454 OWN(%) 35.91 30.60 24.31 100.00 0.00 8454 INVPR (number scale 0-4) 2.38 3.00 1.43 4.00 0.00 8454 LGLST (dummy) 0.67 1.00 0.47 1.00 0.00 8454 LVRG (ratio) 29.15 27.97 22.36 72.86 0.00 8454 CRPRN (ratio) 0.13 0.17 0.33 0.64 -0.80 8454 SIZE (number) 12.47 12.17 2.32 17.09 8.73 8454 TLDBT (in millions) 654834.9 31609.00 1638277. 6763000. 0.00 8454
In table 3 and 4, descriptive statistics are presented separately for firms in common and civil law countries respectively. Table 3 contains 2751 observations while table 4, contains 5703. Concerning the dependent variable, in both tables, appears to have no considerable differences with results in Table 2. In addition, the independent variable of the sample, the large shareholders’ ownership concentration remains in remarkable high levels as exactly in Table 2, with a slight decrease in table of firms’ distribution in common law countries. As for the investor protection moderating variable in both Table 3 and 4, results appear in line with findings from Table 2. More specifically, the mean, median and standard deviation of the investor protection variable in Table 3 are 3.75, 4.00 and 0.82 while in Table 4 are 1.71, 2.00 and 1.17 respectively. The values of this particular variable range between 1 and 4 in Table 3, while 0 and 3 in Table 4, because of taking into account the main difference of the tables, the different legal systems of the firms which affect investor protection variable’s results.
Table 3: Descriptive statistics of the distribution of the variables in common law countries
Descriptive
Statistics Mean Median Std. Dev. Maximum Minimum Observations
RISK (%) -0.03 0.03 0.16 0.13 -0.42 2751 OWN(%) 18.56 14.97 16.44 100.00 0.00 2751 INVPR (number scale 0-4) 3.75 4.00 0.82 4.00 1.00 2751 LGLST (dummy) 0.00 0.00 0.00 0.00 0.00 2751 LVRG (ratio) 21.65 17.94 21.19 72.86 0.00 2751 CRPRN (ratio) 0.09 0.20 0.43 0.64 -0.8 2751 SIZE (number) 11.84 11.35 2.44 17.09 8.73 2751 TLDBT (in millions) 519319.7 5699.00 1479027. 6763000. 0.00 2751
Table 4: Descriptive statistics of the distribution of the variables in civil law countries
Descriptive
Statistics Mean Median Std. Dev. Maximum Minimum Observations
RISK (%) -0.004 0.02 0.11 0.12 -0.42 5703 OWN(%) 44.28 46.35 23.03 100.00 0.00 5703 INVPR (number scale 0-4) 1.71 2.00 1.17 3.00 0.00 5703 LGLST (dummy) 1.00 1.00 0.00 1.00 1.00 5703 LVRG (ratio) 32.77 32.34 22.00 72.86 0.00 5703 CRPRN (ratio) 0.15 0.16 0.27 0.64 -0.8 5703 SIZE (number) 12.78 12.45 2.18 17.09 8.73 5703 TLDBT (in millions) 720204.4 48855.00 1706080. 6763000. 0.00 5703
Table 5: Descriptive statistics for country variables
Variables
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Country FIRMS RISK OWN INVPR LGLST LVRG CRPR SIZE TLDBT
Belgium 41 -0.01 48.51 2.00 1.00 29.09 0.18 12.56 347045.11 Germany 186 0.00 47.32 3.00 1.00 29.61 0.17 12.58 681177.4 Denmark 43 0.01 36.12 3.00 1.00 28.30 0.22 14.20 894186.73 France 183 0.01 52.09 0.00 1.00 33.04 0.17 12.68 769677.69 United Kingdom 316 -0.04 19.21 4.00 0.00 20.49 0.08 11.63 414400.39 Greece 68 -0.02 39.01 1.00 1.00 44.56 0.08 11.46 115601.45 Ireland 28 0.00 11.25 1.00 0.00 34.81 0.16 14.18 1704488.1 Italy 76 0.02 52.13 2.00 1.00 39.93 0.17 13.08 449088.58 Sweden 116 -0.05 26.62 2.00 1.00 28.75 0.06 13.39 1303406.7
4.2 Regression model
Table 6: Multivariate analysis Variable (1) (2) (3) INTERCEPT -0.227177*** (0.007010) 0.005283 (0.003694) -0.214558*** (0.007331) OWN 0.000340*** (3.79E-05) 0.000656*** (7.69E-05) -0.000222** (9.74E-05) INVPR 0.003527*** (0.001254) INVPR*OWN -0.000152*** (2.74E-05) LGLST -0.023556*** (0.003433) LGLST *OWN 0.000767*** (0.000109) LVRG -1.22E-05 (4.29E-05) -2.91E-05 (4.37E-05) -1.73E-06 (4.35E-05) CRPRN 0.249408*** (0.003110) 0.249014*** (0.003113) 0.247383*** (0.003116) SIZE 0.014099*** (0.000591) 0.014142*** (0.000594) 0.014133*** (0.000601) TLDBT -1.04E-08*** (7.67E-10) -1.02E-08*** (7.67E-10) -1.03E-08*** (7.70E-10) NUMBER OF OBSERVATION 8454 8454 8454 ADJUSTED R-SQUARED 0.58 0.58 0.58
Concerning the first regression (1), results indicate that ownership concentration has a coefficient of 0.0003 (p-value= 0.00), which is statistically significant in the level of 1%. This implies that the concentration of ownership affect positively risk-taking decisions. More specifically, an increase in the ownership by 1 unit would provoke an increase in risk-taking by 0.0003 units. As far as the control variables are concerned both corporate earnings and size are statistically significant in all levels of statistical significance with coefficients 0.2494 (p-value=0.00) and 0.0140 (p-value= 0.00) respectively. In contrary, total debt is also statistical significant in all levels of statistical significance with a negative coefficient of 1.04E-08 (p-value=0.00). In other words, total debt has an impact in risk-taking decisions but a negative one as an increase in total debt would cause a decrease in risk-taking decisions. Finally, leverage control variable has hardly any influence in corporations’ risk-taking decisions. Therefore the first hypothesis is accepted due to the positive influence of large shareholder ownership concentration to firm’s risk-taking decisions.
The results, of the second regression, show that the coefficients for both investor protection*ownership and total debt are negative: -0.0001 and -1.02E-08 respectively (p-value=0.00) for both investor protection*ownership and total debt which implies that investor protection*ownership and total debt factors are statistically significant in statistical significance level of 1%. These negative coefficients imply that when investor protection*ownership and total debt of a company increase by 1, its risk value decreases by approximately 0.0001 and 1.02 units respectively. Additionally, the coefficient of leverage is also negative, -2.91E-05 (p-value= 0.50) but the variable is not statistically significant in any statistical significance level, even in 10%. Therefore leverage control variable does not have any influence on the dependent variable.
Increasing corporate earnings or size by 1 unit, risk increasing also around 0.24 and 0.01 respectively.
Taking into account the H1a hypothesis, we can state conclusions only regarding ownership structure, investor protection, the combination of ownership and investor protection and three out of four control variables. More specifically, large shareholders’ ownership structure has a positive influence in risk-taking decisions. Additionally, investor protection considered as a significant variable therefore has a positive influence in risk-taking decisions while the combination of ownership and investor protection has a negative effect in the dependent variable. Hence, hypothesis 1a could be considered as valid since it is supported by the results of the regression model. Concerning the control variables, the table provides evidence that except from leverage, which has no impact in risk-taking decisions, corporate earnings and size influence risk-taking decisions positively while the dependent variable influenced negatively from total debt.
To analyze the third hypothesis, the third column of the table is considered, including large shareholders’ stake, legal system, legal system*ownership, leverage, corporate earnings, size and total debt variables and using the Ordinary Least Squares Method (OLS).
which implies that leverage is statistical insignificant in any statistical significant level and therefore cannot influence risk-taking decisions.
Looking at the results from the perspective of the second hypothesis it could be assumed that all factors, except from leverage, influence in some level risk-taking decision. Generally, it could be concluded that large shareholders’ ownership does affect partially and negatively risk-taking decisions while the three out of four control variables play a vital role in risk-taking decisions as well. More specifically, corporate earnings and size affect positively taking decisions whereas total debt could decline the amount of risk-taking decisions.
The main findings also show that the different legal systems influence risk-taking decisions. This moderating variable is explained by the distinction in common law and civil law countries. Common law countries are assigned with 0 in the dummy which created in the regression model, while civil law countries coded with 1 in the same model. The results of the regression show that legal system variable affects negatively risk-taking decisions. Consequently, common law countries take risk-taking decisions 0.023 times more than civil law countries. Therefore firms in common law countries have a more positive effect on risk-taking decisions than firms in civil law countries, which implies that firms in common law countries have a riskier behavior while firms in civil law countries have a more conservative behavior regarding risk-taking decisions. Hence this argument constitutes the main reason why the second hypothesis have to be accepted.
5. Conclusion
relationship between risk-taking decisions and large shareholders’ ownership. Regarding the first regression, results indicate a positive impact of large shareholders’ ownership concentration to corporations’ risk-taking decisions which are in line with previous studies (Paligorova, 2010).
However, there are contradictory evidence of the influence of large shareholders’ stake in risk-taking decisions as in the first and second regression the influence is positive while in the third regression is negative. The reason of this contradiction in the results is due to the presence of investor protection and the different legal system variables. More specifically, legal protection does play a significant role in risk-taking decisions and ownership of large shareholders. Countries with higher investor protection are driven by more risk-taking decisions while countries with weak investor protection are more cautious concerning risk decisions. Furthermore, large shareholders’ ownership combined with investor protection tends to have a negative influence in risk-taking decisions.
In addition to the above, the second variable which could cause severe implications in risk-taking decisions is the different country political institutions which divided in two different legal systems, between common law countries and civil law countries. Corporations in common law countries have a more risk attitude concerning risk-taking decisions by 2.3% more than firms in civil law countries which are more preservative.
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Appendix
Table 1: Definition of variables
Variable Source
Risk Data collected from DATASTREAM database. For each firm with available EBITDA/Total Assets for at least five years across 2007-2014, risk is measured as the deviation of the firm’s EBITDA/Assets from the industry adjusted ROA (John et al., 2008; Paligorova, 2010).
Equity Ownership Structure Data collected from ORBIS database. Equity ownership is measured as the percentage of direct and indirect equity ownership of the largest shareholder. If the largest owner has less than 10% ownership, the value is coded at zero (Paligorova, 2009).
Investor Protection For investor protection the 4 scale table of creditor protection by countries from La Porta et al. (1998) is used.
Size Size is one of the control variables. DATSTREAM database used to collect these data. Size is measured as the natural logarithm of total assets (ln (Total Assets) (Chen and Steiner, 1999).
Leverage DATASTREAM database used in collecting data for leverage which measured by Total Debt/ Assets.
Corporate Earnings Corporate earnings constitutes another control variable and measured as EBITDA/ Assets. DATASTREAM is the database for corporate earnings data.
