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The study aims to examine the association of corporate governance and firm innovation with idiosyncratic risk. The sample of the study consist of all non-financial listed firms in Shanghai and Shenzhen stock exchange of China distributed in twelve diverse industries from 2007 to 2016. Agency theory postulates that the separation of ownership and control has the potential to create agency problems that affect not only firm performance and stock return volatility but also affect corporate innovation. Owing to the distinct nature of Chinese ownership structure this study aims to investigate the role of SOEs and Non-SOEs in the relationship of corporate governance, and innovation with idiosyncratic risk, which remains unexplored in the literature.
The first chapter presents an introduction to the study. This part discusses the motivation and objectives of the thesis. Its further sheds light on the conceptual framework, contribution, innovation, structure and summary of the findings. Chapter two identifies the theoretical background of the study. This chapter provides the theories related to corporate governance, corporate innovation and idiosyncratic risk. Chapter three describes the Salient Features of Chinese Stock Markets which includes the history of Shenzhen and Shanghai stock exchanges, shares types, and listed firms on both stock markets. Chapter four includes corporate governance and innovation in the context of China. Board structure, the role of CEO, board size, CEO duality, input and output innovation.
Chapter five scrutinises the influence of board governance index on idiosyncratic risk in the distinct environment of Chinese listed firms. In sharp divergence with the prodigious empirical evidence based on the developed market like the UK, we documented that good board governance of Chinese listed firms significantly are more likely to decrease idiosyncratic risk. Also, our novel findings endorsed that state-owned firms are more oriented towards reducing idiosyncratic risk than non-state-owned firms. Similarly, the foreign listed firms are more concerned to mitigate idiosyncratic risk as compare to the private listed firms in China. Moreover, our results obtained from traditional CAPM are not sensitive to the alternative proxies of idiosyncratic risk. Finally, we found a stronger impact of board governance index on idiosyncratic risk after controlling the endogeneity problem. The robust empirical findings of this study will be vital for the shareholders, academicians, and practitioners while analysing the level of risk-taking behaviour of firms.
Chapter six intended the association between board independence and idiosyncratic risk. We identify the role of board independence in SOEs and Non-SOEs and measure how the board independence deals with idiosyncratic risk in both SOEs and Non-SOEs. First, we find that board independence is negatively and significantly related to the idiosyncratic risk, systematic risk and total risk. Second, we also find a negative and significant relationship between board independence and idiosyncratic risk in both SOEs and Non-SOEs. However, the intensity to reduce idiosyncratic risk in Non-SOEs is more than SOEs. Thirdly, our results are unswerving with the spirit of the CSRC?s 2001 Guidelines (Introducing Independent Directors to the Board of Directors of Listed Companies that required listed firms boards to have at least one-third of independent directors). This reform of one-third independent directors is more efficient to reduce idiosyncratic risk than the previous one (i.e. firms should have at least two independent directors). Fourthly, our results are not biased and do not have any endogeneity issue. Finally, our findings are not sensitive to the alternative proxies of idiosyncratic risks and board independence.
Chapter seven discusses the association between corporate innovation and idiosyncratic risk. We have examined the input and output innovation impact on idiosyncratic risk separately. We also identify the impact of board independence reforms (one-third and at least two independent directors) on idiosyncratic risk. Firstly, the results of this chapter reveal that both input innovation (R&D intensity-1 and R&D intensity-2) have a positive and significant relationship with idiosyncratic risk and total risk. Similarly, we also found a negative and significant relationship between output innovations (patents and patents/R&D investment) and firm risk and total risk. Secondly, we proved that there is no reversal causality in the model and our results are valid and robust. Thirdly, we do compare the SOEs and Non-SOEs. In all cases, parallel to the overall sample, our results of SOEs and Non-SOEs are same.
Nevertheless, the coefficients of input and output innovation are different in SOEs and Non-SOEs. Non-state owned firms have more volatility in their firm-specific returns than state-owned firms. Similarly, Non-state owned firms are more likely to reduce idiosyncratic risk than state-owned firms.
Finally, chapter eight concludes the thesis. It presents practical implications, directions for future research and limitations of the study.
The first chapter presents an introduction to the study. This part discusses the motivation and objectives of the thesis. Its further sheds light on the conceptual framework, contribution, innovation, structure and summary of the findings. Chapter two identifies the theoretical background of the study. This chapter provides the theories related to corporate governance, corporate innovation and idiosyncratic risk. Chapter three describes the Salient Features of Chinese Stock Markets which includes the history of Shenzhen and Shanghai stock exchanges, shares types, and listed firms on both stock markets. Chapter four includes corporate governance and innovation in the context of China. Board structure, the role of CEO, board size, CEO duality, input and output innovation.
Chapter five scrutinises the influence of board governance index on idiosyncratic risk in the distinct environment of Chinese listed firms. In sharp divergence with the prodigious empirical evidence based on the developed market like the UK, we documented that good board governance of Chinese listed firms significantly are more likely to decrease idiosyncratic risk. Also, our novel findings endorsed that state-owned firms are more oriented towards reducing idiosyncratic risk than non-state-owned firms. Similarly, the foreign listed firms are more concerned to mitigate idiosyncratic risk as compare to the private listed firms in China. Moreover, our results obtained from traditional CAPM are not sensitive to the alternative proxies of idiosyncratic risk. Finally, we found a stronger impact of board governance index on idiosyncratic risk after controlling the endogeneity problem. The robust empirical findings of this study will be vital for the shareholders, academicians, and practitioners while analysing the level of risk-taking behaviour of firms.
Chapter six intended the association between board independence and idiosyncratic risk. We identify the role of board independence in SOEs and Non-SOEs and measure how the board independence deals with idiosyncratic risk in both SOEs and Non-SOEs. First, we find that board independence is negatively and significantly related to the idiosyncratic risk, systematic risk and total risk. Second, we also find a negative and significant relationship between board independence and idiosyncratic risk in both SOEs and Non-SOEs. However, the intensity to reduce idiosyncratic risk in Non-SOEs is more than SOEs. Thirdly, our results are unswerving with the spirit of the CSRC?s 2001 Guidelines (Introducing Independent Directors to the Board of Directors of Listed Companies that required listed firms boards to have at least one-third of independent directors). This reform of one-third independent directors is more efficient to reduce idiosyncratic risk than the previous one (i.e. firms should have at least two independent directors). Fourthly, our results are not biased and do not have any endogeneity issue. Finally, our findings are not sensitive to the alternative proxies of idiosyncratic risks and board independence.
Chapter seven discusses the association between corporate innovation and idiosyncratic risk. We have examined the input and output innovation impact on idiosyncratic risk separately. We also identify the impact of board independence reforms (one-third and at least two independent directors) on idiosyncratic risk. Firstly, the results of this chapter reveal that both input innovation (R&D intensity-1 and R&D intensity-2) have a positive and significant relationship with idiosyncratic risk and total risk. Similarly, we also found a negative and significant relationship between output innovations (patents and patents/R&D investment) and firm risk and total risk. Secondly, we proved that there is no reversal causality in the model and our results are valid and robust. Thirdly, we do compare the SOEs and Non-SOEs. In all cases, parallel to the overall sample, our results of SOEs and Non-SOEs are same.
Nevertheless, the coefficients of input and output innovation are different in SOEs and Non-SOEs. Non-state owned firms have more volatility in their firm-specific returns than state-owned firms. Similarly, Non-state owned firms are more likely to reduce idiosyncratic risk than state-owned firms.
Finally, chapter eight concludes the thesis. It presents practical implications, directions for future research and limitations of the study.