Corporate Reputation,Internal Control Quality And Risk-taking

Risk-taking is an important driver of long-term sustainable economic growth.At the firm level,a high level of risk-taking indicates that firms are able to fully identify and exploit investment opportunities,promoting greater incentive to innovate,optimising the efficiency of capital allocation and enhancing corporate value.At the societal level,the high returns expected from high-risk projects can accelerate social capital accumulation,increase social productivity and promote faster socio-economic growth.However,excessive risk-taking by enterprises is likely to lead to adverse economic consequences and even plunge them into bankruptcy.Many scholars argue that it was the excessive risk-taking by US companies that led to the severe economic crisis in 2008.Therefore,it is important to explore the factors that influence the curbing of excessive risk-taking by enterprises to maintain the safe and smooth operation of enterprises.Corporate reputation is a stakeholder perception of a company based on its past performance and is characterised by an imbalance between the length of time it takes to build a reputation and its vulnerability,i.e.it takes longer for a company to build its reputation and less time to destroy it,making it more important to maintain it once it is built.A good reputation should reduce uncertainty among stakeholders about a firm’s behaviour,and risky investment projects often signal significant uncertainty about a firm’s operations,which is not conducive to reputation maintenance.Therefore,companies with a good reputation are more risk-averse.In June 2008,China issued the Basic Code for Enterprise Internal Control.The Code sets out the following requirements for China’s listed companies in terms of risk prevention:China’s listed companies should establish a comprehensive and effective risk identification,analysis,prevention and response system,improve their business management and risk prevention capabilities,and promote their sustainable development.Besides,there is much empirical evidence that internal control as an internal corporate system tool helps companies improve their risk management.At the same time,the self-reinforcing and self-screening effects of reputation may encourage companies to implement more effective internal control measures,thereby discouraging excessive risk-taking behaviour.This paper therefore takes this as an entry point to examine the impact of corporate reputation on the level of risk-taking and the quality of internal controls.On this basis,we explore whether internal control is a mediating variable of corporate reputation on risk-taking.The hypotheses are tested using a sample of A-share listed companies in Shanghai and Shenzhen for the period 2010-2020 and robustness tests are conducted.The empirical findings of this paper show that:(1)corporate reputation,as an important informal institution,has a dampening effect on risk-taking behaviour;(2)improving corporate reputation helps firms to improve the quality of internal control;(3)testing the mediating effect shows that the quality of internal control partially mediates the relationship between corporate reputation and risk-taking behaviour;(4)further analysis shows that in the more market-oriented sample group and in the industry,the quality of internal control plays a part in the relationship between corporate reputation and risk-taking behaviour.(4)further analysis shows that the inhibitory effect of corporate reputation on risk-taking is more significant in the more market-oriented sample group and the more concentrated group;and that internal control plays a greater mediating role in the less market-oriented and less concentrated group;risk-taking has an inverted U-shaped relationship with firm value.The contributions of this paper include:(1)exploring the impact of corporate reputation on risk-taking from the perspective of informal institutions,thus further extending the research findings on the impact of informal institutions on the level of risk-taking.(2)It demonstrates that corporate reputation can inhibit risk-taking by improving the quality of internal control,providing process evidence that corporate reputation affects risk-taking,deepening firms’ understanding of their reputation and prompting them to strive to improve their reputation in order to maintain smooth operations.