Ownership, Managerial Traits, And Corporate Risk Taking

Corporate risk taking reflects the analysis and selection of projects that have varying uncertainties associated with their expected outcomes and corresponding cash flows in the managers'investment decision-making process. Under perfect capital markets, managers should undertake all (and only) positive expected net present value (NPV) projects and forgoing any projects that have negative NPV, so as to maximize the market value of the firm. However, a series of literatures have documented the existence of a variety of agency conflicts within modern corporations, and managers' preference towards risk also has great heterogeneity, which makes the managers' investment decision-making do not necessarily follow the NPV rule. Therefore, there will be great differences in the level of risk taking among companies. Risk taking has a significant impact on both corporate development and economic growth. Due to risky investment projects have higher expected returns than safe ones, and it also helpful to promote technological innovation, a body of literature documents that corporate risk taking is a fundamental driver of long-term economic growth. Therefore, in-depth study of the influence factors and economic consequences of corporate risk taking will be not only provide theoretical guidance for enterprises to identify effective ways to improve the efficiency of capital allocation, but also provide policy recommendations for regulatory authorities to make relevant policies to promote business innovation.This dissertation analyzes how nature of ownership and managerial individual traits influence the corporate risk taking. First, according to agency theory, agency conflicts resulting from the separation between ownership and control affect various firm decisions. To protect their private benefits, insiders may not follow the NPV rule during their choice of investment projects. For state-owned enterprises, strong government intervention may lead them to seek to maximize social stability and employment, which may lead firms to pursue conservative investments (i.e., less risky projects). Meanwhile, the lack of adequate monitoring and driving of these political-oriented managers will also likely discourage risky investments. Consequently, with respect to the non-state-owned enterprises, state-owned enterprises have significantly lower risk taking level. Secondly, based on security considerations, risk reverse mangers may opt to be conservative in directing corporate investment, even to the extent of passing up value-enhancing risky projects. Behavioral finance theory suggests that personal characteristics will play an important role on the managerial attitude towards risk, and thus affect their investment selection choice. Therefore, these personal traits which may strengthen risk appetite will lead managers to undertake more value-enhancing risky projects.Using data of listed companies in China from1998-2011as sample, the dissertation examines whether the nature of ownership and managerial personal traits affect corporate risk taking, and how institutional environment affect the influence of ownership nature and managerial personal traits on risk taking. Our main findings are as follows:First, nature of ownership has a significant impact on the risk choices in corporate investment. Relative to non-state-owned enterprises, state-owned enterprises are more likely to pass up positive net present value risky projects, so that they showing a significantly lower risk-taking level. Moreover, this effect mainly exists in the median and small-sized firms. Further results find that, a more liberalized market leads bigger gap of risk-taking between the state-owned enterprises and non-state-owned enterprises. Then, we analyzed the risk choice during the process of privation of state-owned enterprises, and the DID model's results suggest that the corporate risk taking is significantly increased after privatization. Following Acemoglu and Johnson (2005), we further test the impacts of property rights institutions and contracting institutions on risk-taking in the process of privatization. The results show that the impact on corporate risk-taking in the process of privatization is more pronounced in provinces with good property rights institutions, while the contract institutions have little explanation.Second, managerial personal traits also have a significant impact on the risk choices in corporate investment. Overconfident CEOs may systematically overestimate the return to their investment projects and underestimate the cost of these projects, which may strengthen risk appetite and lead managers to undertake more value-enhancing risky projects at last. We find that there is a significantly positive association between managerial overconfidence and corporate risk-taking. Then, because manager with bank experience can effectively alleviate the problem of financing constraints faced by corporate, there is a significantly positive association between managerial bank experience and corporate risk taking. Further results find that, the relations between managerial personal traits and corporate risk taking depend on the nature of ownership. Specifically, risk-taking is more positively affected by managerial overconfidence and bank experience in non-state-owned enterprises. Third, in order to give empirical evidence to the view of "risk-taking is a fundamental driver of long-term economic growth", the dissertation further examines the economic consequence of corporate risk taking from the micro perspective. We employ average assets growth?average sales growth and Tobin Q as measures of firm performance. The results find that the riskiness measures are positively associated with firm performance, including the efficiency of capital allocation. These results are robust to including various controls suggested in the literature. Thus, our results show that undertaking positive net present value risky helps to enhance firm value and increase shareholder wealth.The dissertation contributes to the literature at least in the following three aspects. First, on the basis of NPV rule application in corporate investment decision, and combined with the theory of managerial risk attitudes and agency theory, we constructs a comprehensive and in-depth theoretical framework for corporate risk choices in investment decisions. Second, by showing how nature of ownership and managerial traits influence corporate risk taking, which affects in turn firm performance, we not only provides new explanations for the determinants of corporate risk taking, and also contributes to the further understanding of how different institutions affect the consequences of corporate investment. Third, based on emerging markets background of China, we provide new empirical evidence to the view of "risk-taking is a fundamental driver of long-term economic growth" from a micro perspective.