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Does shareholder-oriented corporate governance reduce firm risk? Evidence from listed European companies

Author

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  • Leopold Djoutsa Wamba
  • Eric Braune
  • Lubica Hikkerova

Abstract

Purpose - The purpose of this paper is to explore the impact of the mechanisms of corporate governance on the volatility of companies’ financial profitability. Design/methodology/approach - For the period 2002-2014, the authors evaluate the relations linking various indices involved in corporate governance with the systematic risk supported by these companies for a sample of 355 firms domiciled in Europe. To empirically test these relationships, the authors calculated a synthetic index of corporate governance quality (QGI) based on the 53 items of assessment of the companies’ governance proposed by the database ASSET4. Following the method used by Boncoriet al.(2016), the authors first reduced the number of dimensions of corporate governance by performing a principal component analysis of the sample, which resulted in the following five components: management’s shareholder commitment, shareholder rights, characteristics of the board of directors, transparency of the financial information and independence of the audit. Findings - The results of the tests indicate that the synthetic index of governance that the authors have built is only significant at the 10 percent threshold. The impact of this variable on the systematic risk of the company is of the order of one-tenth of a point. The decomposition of this index into five variables shows that management’s commitment to shareholders and the effectiveness of the board of directors in carrying out its supervisory tasks are likely to reduce, but again to a limited extent, the risk borne by the company. Research limitations/implications - This observation guides the future work in introducing variables that reflect the social responsibilities of the companies in the sample in order to distinguish the effects of social responsibility from those of purely shareholder-oriented governance on systematic risk. Practical implications - This paper demonstrates the interest of good governance on the risk of firms and identifies certain characteristics upon which to act. Originality/value - Although the relations between corporate governance mechanisms and profitability expectations have been the subject of numerous studies, few authors have examined the influence of governorship on the volatility of this profitability, particularly in Europe. To the best of the authors’ knowledge, the rare work on this topic relates to only a limited number of countries.

Suggested Citation

  • Leopold Djoutsa Wamba & Eric Braune & Lubica Hikkerova, 2018. "Does shareholder-oriented corporate governance reduce firm risk? Evidence from listed European companies," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 19(2), pages 295-311, May.
  • Handle: RePEc:eme:jaarpp:jaar-02-2017-0033
    DOI: 10.1108/JAAR-02-2017-0033
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    Citations

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    Cited by:

    1. Prince Hikouatcha & Alain Gilles Tagne Foka & Armand Depesquidoux Fossi & Simplice A Asongu, 2024. "Empirical investigation of the Fintech and financial literacy nexus: Small business managers’ insights in Cameroon," African Journal of Science, Technology, Innovation and Development, Taylor & Francis Journals, vol. 16(2), pages 219-237, February.
    2. Alain Gilles FOKA TAGNE & Romuald Franklin NGUINGNA DJOMO & Isidore BIMEME BENGONO & Anaclet ANANGA ONANA, 2020. "Appréciation de la performance hospitalière des hôpitaux publics au Cameroun," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 11(2), pages 331-344, December.
    3. Glen Gauci & Simon Grima, 2020. "The Impact of Regulatory Pressures on Governance on the Performance of Public Banks’ with a European Mediterranean Region Connection," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 360-387.
    4. Charl de Villiers & Jing Jia & Zhongtian Li, 2022. "Corporate social responsibility: A review of empirical research using Thomson Reuters Asset4 data," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4523-4568, December.
    5. Fareed, Zeeshan & Wang, Nianyong & Shahzad, Farrukh & Meran Shah, Syed Ghulam & Iqbal, Najaf & Zulfiqar, Bushra, 2022. "Does good board governance reduce idiosyncratic risk in emerging markets? Evidence from China," Journal of Multinational Financial Management, Elsevier, vol. 65(C).
    6. Alain Gilles FOKA TAGNE & Nestor Magloire LETSINA & David Claude NOUHOU NKENGANG & Aurélien FOMEKONG NOUBOSSE, 2021. "Rôle des outils de contrôle de gestion dans l’amélioration de la performance organisationnelle des entreprises au Cameroun," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 12(2), pages 103-123, December.
    7. Mehdi Mili & Sami Gharbi & Frédéric Teulon, 2019. "Business ethics, company value and ownership structure," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 23(4), pages 973-987, December.
    8. Alain Gilles FOKA TAGNE & Romuald Franklin NGUINGNA DJOMO & Isidore BIMEME BENGONO & Anaclet ANANGA ONANA, 2020. "Appréciation de la performance hospitalière des hôpitaux publics au Cameroun," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 11(2), pages 331-344, December.

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