Board structure and corporate risk taking in the UK financial sector

Akbar, Saeed; Kharabsheh, Buthiena; Poletti-Hughes, Jannine; Shah, Syed Zulfiqar Ali

Abstract

© 2017 Elsevier Inc. This paper examines the relationship between board structure and corporate risk taking in the UK financial sector. We show how the board size, board independence and combining the role of CEO and chairperson in boards may affect corporate risk taking in financial firms. Our sample is based on a panel dataset of all publicly listed firms in the UK financial sector, which includes banks, insurance, real estate and financial services companies over a ten year period (2003 − 2012). After controlling for the effects of endogeneity through the application of the dynamic panel generalized method of moments estimator, the findings of this study suggest that the presence of non-executive directors and powerful CEOs in corporate boards reduces corporate risk taking practices in financial firms. The negative relationship can be explained within the agency theory context, where managers are regarded as more risk averse because of the reputational and employment risk. An increased power concentration is therefore expected to enhance the risk aversion behaviour of directors. The findings however, do not show any significant effect of board size on corporate risk taking in financial firms. As this study covers recommendations of the UK Corporate Governance Code on the role of corporate boards in managing firms' risk, the empirical evidence could be useful for corporate governance regulation and policy making.

Citation

Akbar, S., Kharabsheh, B., Poletti-Hughes, J., & Shah, S. Z. A. (2017). Board structure and corporate risk taking in the UK financial sector. International review of financial analysis, 50, 101-110. https://doi.org/10.1016/j.irfa.2017.02.001

• Journal Article Type: Article
• Acceptance Date: Feb 10, 2017
• Online Publication Date: Feb 11, 2017
• Publication Date: 2017-03
• Deposit Date: Sep 18, 2018
• Publicly Available Date: Sep 19, 2018
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 50
• Pages: 101-110
• DOI: https://doi.org/10.1016/j.irfa.2017.02.001
• Keywords: Corporate governance; Financial sector; Board structure; Risk; Endogeneity
• Public URL: https://hull-repository.worktribe.com/output/519272
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1057521917300194?via%3Dihub
• Related Public URLs: http://wrap.warwick.ac.uk/85929/
• Contract Date: Sep 19, 2018