CEO power, corporate risk taking and role of large shareholders

Abstract

Purpose

This paper aims to investigate whether a powerful chief executive officer (CEO) impacts corporate risk taking in the distinctive institutional and market setting of China? Second, in case such relationship exists, the paper further aims to investigate whether the presence of large shareholders affects it, and finally, whether this effect of large shareholders varies in state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs).

Design/methodology/approach

The authors have used a sample of 1,502 Chinese firms listed on Shanghai and Shenzhen stock exchanges. Sample period is 2008-2013. Besides conventional fixed-effect regression, dynamic panel data estimation (generalized method of moments) is applied to address the potential endogeneity.

Findings

The results show that CEO power is negatively related with corporate risk taking in two risk proxies, i.e. total risk and idiosyncratic risk. Second, the presence of large shareholders significantly affects this relationship, but does not change the primary negative relationship between CEO power and corporate risk taking. Finally, the results show that the relationship between CEO power and corporate risk taking is different in SOEs and NSOEs. The findings of this paper contend the organizational and behavioral theory viewpoint that individual decisions are more extreme.

Practical implications

This study provides useful implication for policymakers and suggests that while evaluating CEO’s performance, institutional and market settings should be considered.

Originality/value

This study provides new insights on the impact of CEO power on corporate risk taking under the two distinctive features in a developing country, i.e. presence of large shareholders and state-owned enterprises.

Citation

Haider, J. and Fang, H.-X. (2018), "CEO power, corporate risk taking and role of large shareholders", Journal of Financial Economic Policy, Vol. 10 No. 1, pp. 55-72. https://doi.org/10.1108/JFEP-04-2017-0033