Board Governance and Managerial Risk Taking: Dynamic Analysis

Tingting Zhou and Wei-an Li

Chinese Economy, 2016, vol. 49, issue 2, 60-80

Abstract: The allocation of investment dollars between R&D (high-risk investments) and capital expenditure (low-risk investments), as a reflection of managers’ inclination to take risks, is an important issue in the field of corporate governance and corporate finance because of the different interests and responsibility orientations of key stakeholders. Based on the endogeneity of board governance and managerial risk taking, this article discusses the relationship between board governance and managerial risk taking using Instrumental Variables and Generalized Method of Moments. This article also discusses the effects of board governance on managerial risk taking in the long-term dynamic perspective. The results show that board governances have positive effects on managerial risk taking; that is, board governance would lead to higher investment in R&D expenditures and lower investment in capital expenditures, not only in the current year, but also over multiple years. This evidence suggests that effective board governance plays a significant role in promoting firm innovations.

Date: 2016
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DOI: 10.1080/10971475.2016.1142823

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