Corporate Governance and Risk-Taking





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    • John is with Stern School of Business, NYU; Litov is with Olin Business School, Washington University in St. Louis; and Yeung is with National University of Singapore Business School and Stern School of Business, NYU. We thank the editor, Robert Stambaugh, and an anonymous referee for their helpful comments. We are also grateful for comments and discussions from Heitor Almeida, Yakov Amihud, David Backus, Matt Clayton, Art Durnev, Phil Dybvig, Bill Greene, Jianping Mei, Todd Milbourn, Randall Morck, Holger Mueller, Stew Myers, Darius Palia, Thomas Philippon, Enrico Perotti, Annette Poulson, S. Abraham Ravid, Joshua Ronen, Anjan Thakor, Peter Tufano, René Stulz, S. Viswanathan, Daniel Wolfenzon, Jeffrey Wurgler, David Yermack, Luigi Zingales, and the participants of the seminars at Brown University, Peking University, New York University, Rutgers University, Rensselaer Polytechnic Institute, EISAM (European Institute for Advanced Studies in Management) in Brussels, FIRN (Financial Integrity Research Network) in Melbourne, the second corporate governance conference at Washington University in St. Louis, the 2005 AEA meetings in Philadelphia, the Spring 2005 corporate governance NBER meetings, the 2005 EFA meeting in Moscow, and the 2007 AFA meeting in Chicago.


Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.