Corporate Risk-Taking and Ownership Structure · review of various forms of ownership control mechanisms in corporations around the world. Dual-class shares, cross-ownership and pyramid

Corporate Risk-Taking and

Ownership Structure

Teodora Paligorova∗

This version: April 17, 2009

Abstract

This paper investigates the determinants of corporate risk-taking. Shareholders

with substantial equity ownership in a single company may advocate conservative

investment policies due to greater exposure to firm risk. Using large cross-country

sample, I find a positive relation between corporate risk-taking and equity owner-

ship of the largest shareholder. This result is entirely driven by investors holding

equity ownership in more than one company, thus achieving better portfolio diver-

sification compared to shareholders with a single ownership stake. Stronger legal

protection of shareholder rights is associated with more risk-taking, while stronger

legal protection of creditor rights reduces risk-taking.

JEL classification: G34; G31;

Key Words: Corporate Governance; Ownership Structure; Incentives

∗Address: Bank of Canada, 234 Wellington Street, Ottawa, Ontario, Canada, K1A0G9. E-mail:[email protected]. The views expressed in this paper are those of the author. No respon-sibility for them should be attributed to the Bank of Canada.

1 Introduction

Excessive risk-taking is viewed as a contributing factor to the market turmoil that erupted

in the United States around mid-2007. Among the most frequently debated channels

that have propagated the accumulation of risky exposures are ill-designed compensation

policies, capital regulation, originate-to-distribute business model, low short-term interest

rates, and others.1 An important agency issue, however, that has received only limited

attention by policymakers and scholars is the role of a firm’s ownership structure in

corporate risk-taking.

From a policy making point of view the effect of shareholders’ equity ownership on

corporate risk-taking is an important topic for a number of reasons. For example, appetite

for risk will result in high-variance asset composition. As pointed out by Wright et al.

(1996), shareholders with significant stakes in a company can shape the nature of its

corporate risk-taking, which may affect a firm’s ability to compete and eventually its

survival. Excessive risk-taking by firms may result in massive bankruptcies, causing

repercussion that are felt in the whole economy.

The separation of ownership and control in modern corporations induces an asym-

metry of risk-taking and rewards between managers and shareholders. Managers may

avoid risky projects to secure their non-diversifiable human capital in firms, while owners

may choose risky projects to increase the value of their equity holdings. Under the sep-

aration of ownership and control, one way to alter a firm’s risk-return profile is external

shareholders to exercise significant voting power. Contrary to the notion of dispersed

ownership in modern corporations, La Porta et al. (1999) highlight that large corpora-

tions have shareholders with sizable ownership stakes which potentially resides the control

1Policy makers agreed that compensation policies have allowed short-term benefits to be translatedinto huge compensation increases while there was no liability for long-term losses (See CounterpartyRisk Management Policy Group III, “Containing Systematic Risk: The Road to Reform,” August 2008).Weaknesses in bank capital framework have indirectly encouraged banks to finance their risky activi-ties with short-term borrowing which has also been seen as a (temporary) mechanism to mitigate theshareholder-manager problem in banks (Kashiap et al. (2008)). The Financial System Review of Decem-ber 2008 summarizes that the lack of transparency of the originate-to-distribute business model madeit difficult for investors to evaluate the risks and the associated losses from these exposures. Ioannidouet al. (2007) examine the impact of short-term interest rates on banks’ risk-taking. The authors concludethat low interest rates encourage ex-ante risk-taking; banks give more loans to borrowers with weakercredit scores in times of low interest rates, and banks do not price these extra risks.

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in their hand. A study by Holderness (2009) casts doubt that ownership in the US is less

concentrated than elsewhere.2 Although large shareholders are ubiquitous their role in

corporate risk-taking has received limited attention in the literature, unlike managerial

ownership (Denis et al. (1997), Amihud and Lev (1981)), the structure of CEO incentives

(Coles et al. (2006)) and legal protection of investors (John et al. (2008)).

This paper explores the effect of equity ownership of the largest shareholders on

corporate risk-taking by using a large cross-section of companies from 38 countries for

the period 2003-2006. The literature offers conflicting predictions about the impact of

shareholders with sizable ownership on risk-taking that is a firm’s earnings volatility. On

the one hand, shareholders with a sizable ownership stake have powerful incentives to

collect information and monitor managers for the purpose of profit maximization through

the promotion of firm risk-taking (Shleifer and Vishny (1986)). Similar explanation by

Amihud and Lev (1981) is that managers have incentives to reduce their high exposure

to idiosyncratic risk. However, they will not be allowed to take risk-reduction activities

in owner-controlled firms in which external shareholders have incentives to take more

risks. Thus, according to this argument risk-taking is expected to be greater in firms

with large shareholders than in firms with dispersed ownership due to the weakened role

of risk-averse managers. On the other hand, shareholders with a large block of shares

in one company are expected to have lower utility of risk-taking than it could be if the

shareholders had a (well-diversified) portfolio. In addition, large shareholders may be

risk-averse because they value their private benefits of control and in order to secure

them they will invest in safe projects (John et al. (2008)).3

Shareholders face a trade-off between (value-enhancing) risk-taking and the cost of

forgone diversification. When ignoring the role of “underdiversificaiton,” I find evidence

of a positive relation between equity ownership and corporate risk-taking. Equity own-

ership concentration is the percentage of equity ownership of the largest shareholder and

2The prevalence of large blockholders is also studied by Shleifer and Vishny (1986), Morck et al.(1988), La Porta et al. (1999), Claessens et al. (2000) and others. See Morck et al. (2005) for a recentreview of various forms of ownership control mechanisms in corporations around the world. Dual-classshares, cross-ownership and pyramid structures lead to divergence between ownership and control.

3Large shareholders use their voting power to consume corporate resources and benefits that are notshared with the minority shareholders. These are private benefits of control.

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risk-taking is measured with the variation in country- and industry-adjusted corporate

earnings over total assets. The intuition is that shareholders with large stakes exercise

their control to affect the volatility of company earnings over time. This paper further

investigates the mechanism through which risk-taking occurs, that is the role of group

affiliation. It appears that 42% of the firms are affiliated to a group, defined as a struc-

ture comprised of a large number of companies having the same largest shareholder. The

positive relationship between ownership and risk-taking is merely driven by the firms

affiliated to a group. Moreover, this effect is prevalent only for controlling shareholders,

i.e. with equity ownership more than 10%.

Shareholders with large ownership stakes may not achieve their desired level of risk

through portfolio diversification. Large stakes, which are controlling blocks, are often

characterized by privately negotiated trading, the value of which depends on private

benefits of control. Hence, owners holding such stakes may not easily diversify away

their ownership portfolio. Under the assumption that groups provide diversification op-

portunities, shareholders in a group are less exposed to firm-specific risk and thus might

have incentives to promote greater risk-taking.4 Relying on the assumption that unaf-

filiated shareholders are undiversified and thus exposed to firm risk, it is expected to

see them invest in less risky projects. These theoretical arguments suggest that group

affiliation might be an important factor for risk-taking incentives of shareholders.

The key findings are as follows. First, corporate risk-taking and ownership are pos-

itively related on average. This result is robust to various variable definitions. Laeven

and Levine (2009) also study risk-taking and ownership in banks and document a posi-

tive relationship. However, their study do not examine the portfolio of ownership stakes.

Second, after accounting for a shareholder’s participation in a business group, I find that

(i) risk-taking is lower in group-affiliated companies and (ii) the relationship between

risk-taking and ownership is positive only for shareholders that participate in the group;

for the rest, it is negative and insignificant depending on the specification. For exam-

ple, one standard deviation increase in ownership of shareholders that participate in a

4The literature on business groups in emerging markets suggests that business groups promote risk-reduction opportunities through risk-sharing (e.g., Khanna and Yafeh (2005), Khanna and Yafeh (2007)).

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group raises risk-taking by 0.20% of its mean. Interestingly, this result holds only for

controlling shareholders. These findings are preserved even after controlling for various

measures of group diversification such as corporate, geographic and ownership diver-

sification.5 Third, I analyze the influence of shareholders and creditors protection on

corporate risk-taking. La Porta et al. (2000) posit that strong investor protection makes

it more difficult for shareholders to secure their private benefits through conservative

corporate activity, which forces them to pursue risky projects. I document that stronger

shareholders’ rights are positively linked to risk-taking, and stronger creditor rights are

negatively linked to risk-taking. The former result is consistent with John et al. (2008),

and the latter—with Acharya et al. (2008).

The above results continue to hold after accounting for possible endogeneity of the

decision of the largest shareholders to invest in more than one firm and in such a way

to participate in a group. First, I control for unobservable group fixed effects that might

affect risk-taking. Second, I apply Heckman’s correction to control for self-selection bias

induced by the decision of firms to participate in a group. Third, I estimate a two-stage

model. At the first stage, the residuals of time-varying corporate earnings are retrieved,

and at the second stage the standard deviations of the residuals is regressed on ownership

and firm-specific controls. The results are also robust to applying quantile estimation

technique and a number of additional robustness checks.

This paper makes several contributions to the literature. First, the analyzes sheds

light on the role of a relatively unexamined factor that affects corporate risk-taking—

ownership structure. There is large literature investigating ownership and risk-taking

in banks (e.g., Laeven and Levine (2009), Gonzalez (2005)), while only a few studies

focus on non-financial firms (Gadhoum and Ayadi (2003), Wright et al. (1996)). Second,

I account for the equity ownership portfolio of the largest shareholder. Examining a

specific type of groups, consisted of firms that share the same largest shareholders, allows

to view groups not only as a diversification mechanism, but also as a control-enhancing

5Corporate diversification is measured by the number of industries in which firms in the group operate.Similarly geographic diversification is the number of countries in which firms in the group operate, andownership diversification is the number of firms in which the largest shareholders has a sizable stake(10%).

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mechanism. Shareholders exercise control through their first-rank stakes in each firm

in the group. As far as I am aware, this is the first study to examine simultaneously

the impact of stock ownership and group affiliation on risk-taking. Khanna and Yafeh

(2005) examine the role of group affiliation on risk-taking, however, their work does not

explore the role of ownership structure. In addition, I account separately for corporate,

geographic and ownership diversification of groups. Third, I contribute to the growing

literature on law and finance by examining the impact of investor protection indexes on

corporate risk-taking (La Porta et al. (1998), La Porta et al. (1999), John et al. (2008)).

The rest of the paper is organized as follows. In the next section, I briefly discuss

related literature and develop the hypotheses. Section 3 describes the data, variables and

descriptive statistics. Sections 4 and 5 present the estimates of risk-taking regressions

with and without group affiliation. Section 6 addresses the issue of having powerful

shareholders. Section 7 presents various robustness checks and Section 8 concludes.

2 Related Literature and Hypotheses Development

The is research on equity ownership of insiders. Insiders derive utility from reducing the

firm-specific idiosyncratic risk they face. One way to decrease exposure to this type of

risk is to engage in diversifying activities, which is viewed as perquisites in the context

of the agency model. Amihud and Lev (1981) suggest that managers will advocate for

conglomerate mergers to decrease their exposure to “employment risk” (i.e., risk of losing

job, reputation). Managers with higher equity ownership will have higher incentives

for risk-reduction, which justifies more active diversification by these managers. Both

Amihud and Lev (1981) and May (1995) find support of this hypothesis. On the contrary,

Denis et al. (1997) argue that because of agency costs related to diversification, managers

with high equity ownership not invest in these companies. The authors find a negative

relation between the level of diversification and equity ownership which supports the

their agency cost hypothesis.

These studies do not specifically derive predictions about the relationship between

risk-taking and ownership of external shareholders. The underlying assumption is that

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external shareholders are well diversified and they will undertake risky projects. This

assumption is tightly linked with the understanding that ownership structure is dispersed,

i.e., comprised of shareholders with small ownership stakes. Modern corporations around

the world have different ownership structures. A great number of studies show that U.S.

corporations are usually widely dispersed and even if they have large blockholders they

are much less common than in other countries (Morck et al. (1988), Shleifer and Vishny

(1986)). Outside US, large shareholders are prevalent and they exert control through

having ownership in a large group of firms. Holderness (2009) questions the dispersion

of ownership structure in the US by finding that 96% of the firms in their sample have a

blockholder.

The literature suggests two oppositive views of the relation between corporate risk-

taking and equity ownership. One argument that justifies a positive relationship between

risk-taking and ownership is associated with monitoring. It is well recognized that atom-

istic shareholders do not have incentives to monitor the manager, which aggravates the

shareholder-manager agency conflict (Grossman and Hart (1980), Shleifer and Vishny

(1986)). Shareholders with large equity stakes in the company, however, have incentives

to monitor the manager with the purpose of value maximization through taking more

risk projects (Shleifer and Vishny (1986)). One of the purposes of monitoring is to re-

duce information asymmetry between managers and owners resulting in more accurate

alignment of managerial actions and pay. Active (costly) monitoring is associated with

greater precision in detecting the most relevant information for constructing an optimal

CEO contract.6 Large shareholders might not compensate managers for risk-taking but

rather they may bear the risks themselves. So, monitoring reduces the information asym-

metry between manager and shareholders at the cost of a risk transfer from managers

to shareholders presumably without compromising performance incentives. Shareholders

with incentives to monitor will end up taking more risk.

Wright et al. (1996) hypothesize that institutional owners exert a significant and

positive influence on risk-taking because of their incentive to increase firm value through

6The informativeness principle implies that any signal that can be obtained trough monitoring shouldbe used in the compensation contract if it contains additional information not included in the profit(Holmstrom (1979)).

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promotion of risk-taking activities. Accounting simultaneously for the impact of insider

and blockholders’ ownership, the authors do not find a significant relationship between the

latter and risk-taking. Gadhoum and Ayadi (2003) test whether ownership structure of

Canadian firms is negatively related to firm risk. The authors find a nonlinear relationship

between ownership and risk—risk-taking is high at low and high levels of ownership.

John et al. (2008) argue that undiversified large shareholders, assumed to be prevalent

in countries with low investor protection, take less risky projects. Also, shareholders with

significant ownership stake might be reluctant to take more risk due to securing their

private benefits of control. For example, they might desire to maintain good reputation

and/or to enhance control (Jensen and Meckling (1976)).

Shareholders face a trade-off between taking (value-enhancing) risky projects and in-

curring costs of forgone diversification. On the one hand large equity ownership motivate

investors to be risk-takers, on the other hand they are exposed to idiosyncratic fluctua-

tions, which makes them risk-averse. Portfolio theory suggests that holding stock only in

one company makes investors more risk-averse compared to holding diversified portfolio

that removes the nonsystematic risk. In this paper, I emphasize the role of shareholders’

equity portfolios in risk-taking. I examine whether shareholders shareholders change their

risk-taking behavior depending on group participation, i.e., diversification. An analysis of

a shareholder’s portfolio allows for better understanding of the proclivity to risk-taking.

The benefits of group participation are that shareholders offer both risk-reduction and

group-related private benefits Aggarwal and Samwick (2003). It is established that being

part of a group might incur some costs as well. Lang and Stulz (1994) and Berger and

Ofek (1995) show, among others, that diversified firms trade at a discount.

This paper also emphasizes the role of investor protection on corporate risk-taking.

Jensen and Meckling (1976) recognize the role of the legal system in mitigating agency

problems. In addition to equity ownership, the protection of minority shareholders and

creditor rights might influence risk-taking behavior of the top shareholders.7 Recent

7La Porta et al. (2000) point that among protected shareholder rights are “those to receive dividendson pro-rata terms, to vote for directors, to participate in shareholders’ meetings, to subscribe to newissues of securities on the same terms as the insiders, to sue directors or the majority for suspectedexpropriation, to call extraordinary shareholders’ meetings etc. Laws protecting creditors’s rights largelydeal with bankruptcy and reorganization procedures, and include measures that enable creditors to

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work by John et al. (2008) show that better investor protection leads to riskier (but

value enhancing) investments. Large shareholders may not be risk-taking because they

want to preserve their private benefits of control.8 La Porta et al. (2000) propose that

strong legal protection makes securing private benefits more costly. It is expected under

these conditions that shareholders will have greater risk-taking incentives that might

forsake private benefits. In countries with strong legal protection benefits of control are

expected to be lower, which might indirectly increase risk-taking. So, strong investor

protection might be positively related to risk-taking.

Acharya et al. (2008) propose that creditor rights protection might affect risk-taking.

Better protected creditors might increase bankruptcy costs which motivates shareholders

to avoid insolvency. One way to achieve this is by engaging in conservative investment

policies.

2.1 Research Focus

The main focus of this paper is the effect of ownership of the top shareholders on cor-

porate risk-taking. Shareholders face a trade-off between risk-taking and cost of forgone

diversification, which has not been examined in the literature. I address two following

questions. First, is higher equity ownership associated with greater risk-taking? Second,

does shareholders’ diversification with stocks in multiple companies affect risk-taking?

Third, do better protection of investors’ rights affect top shareholder’s risk-taking. After

controlling for other factors affecting risk-taking, I posit that equity ownership of large

shareholders is positively related to corporate risk-taking. The results further suggest

that only shareholders with a portfolio of shares in more than one company have a procliv-

ity for undertaking high-risk activities. Strong investor protection increases risk-taking,

while creditor rights protection decreases it.

repossess collateral, to protect their seniority, and to make it harder for firms to seek court protectionin reorganization.”

8Laeven and Levine (2009) recognize that deposit insurance, capital regulation and shareholders’protection affect the ability of bank owners to take risk. Owners take greater risk to compensate for theconstraint imposed by capital regulation. Gonzalez (2005) finds that deposit insurance and the qualityof the contracting environment increase risk-taking by reducing bank charter value.

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3 Data, Sample, and Empirical Design

I examine the above questions using firm-level ownership data from the OSIRIS database

provided by Bureau Van Dijk. The initial sources of information are from World’Vest

Base, Fitch, Thomson Financial, Reuters, and Moody’s. The data contains the name of

shareholders, their type and the percentage of shareholdings reported once during the

period 2003 to 2006 for listed firms in 38 countries. The initial sample consists of 21,755

listed companies over the period 2003-2006 totaling to 83,672 firm-year observations. To

ensure consistency, only firms with consolidated balance sheets are considered. After

excluding firms from the financial sector (SIC 6000-6999) and firms with total assets less

than $10 million, the analysis-ready sample consists of 13,486 firms.

3.1 Definition of Variables

The OSIRIS data reports the percentage of ownership for each shareholder only once for

the period 2003-2006. Ownership is measured by the summation of the percent of direct

and indirect cash flow rights. Depending ont he specification, ownership less than 10%

is coded at zero.

A business group is defined as a set of legally separated firms that have a common

shareholder.9 An important feature of the definition of a business group in this paper is

that each firm in the group has a common shareholder regardless of the size of her equity

stake. If a top shareholder of one firm has a stake in another firm where the stake is not

ranked as the largest one, these two companies are not classified as belonging to a group.

However, if the stakes in both firms are the largest, then these two firms belong to the

same group. This definition is somewhat different from previously used definitions in the

literature that do not account the ranking of the ownership stake. By considering groups

that are consisted only of the largest ownership stakes in firms, one can examine the role

of shareholders in corporate decision making.

A proxy for risk-taking is the volatility of corporate earnings. In particular, I consider

country- and industry-adjusted dispersion of firm-level earnings over the sample period

9See Cuervo-Cazurra (2006) for an extensive discussion of various definitions of business groups inthe literature.

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2003-2006:

RISK =

√√√√T∑

t=1

(Ei,c,k,t − 1/TT∑

t=1

Ei,c,k,t)2/(T − 1)

where

Ei,c,k,t = EBITDAi,c,k,t/Assetsi,c,k,t − 1/Nc,k,t

Nc,k,t∑

j=1

EBITDAj,c,k,t/Assetsj,c,k,t

Nc,k,t indexes firms within country c, industry k and year t; EBITDA is earnings before

interest, taxes, and depreciation. For each firm with available earnings and assets data, I

compute the deviation of a firm’s EBITDA/Assets from country and industry average for

the corresponding year. Then, the standard deviation of this measure is used to proxy

for risk.

Several variables are recognized to explain most of the cross-sectional variation of

earnings volatility at the firm level. These variable are sales, corporate earnings (EBITDA/Assets)

and book leverage (the ratio is defined as the ratio of long-term and short term debt to

assets) (John et al. (2008), Laeven and Levine (2009), Khanna and Yafeh (2005)). All

accounting data items are converted into $U.S. million. The variables are winsorized

at the 0.5% at each tail of the distribution. To characterize investor protection in each

country, the indexes of anti-director rights and credit rights protection retrieved from La

Porta et al. (1998) are employed.10

10The anti-director rights is “formed by adding one when: (1) the country allows shareholders to mailtheir proxy vote to the firm; (2) shareholders are not required to deposit their shares prior to the generalshareholders’ meeting; (3) cumulative voting or proportional representation of minorities in the board ofdirectors is allowed; (4) an oppressed minorities mechanism is in place; (5) the minimum percentage ofshare capital that entitles a shareholder to call for an extraordinary shareholders’ meeting is less than orequal to 10%; (6) shareholders have preemptive rights that can be waived only by a shareholders’ vote.The index ranges from zero to six. The creditor rights index is defined as a summation of four indexesdefined in La Porta et al. (1998). The index ranges from 0 to 4.

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3.2 Summary Statistics

Table 1 provides descriptive statistics of the distribution of the number of firms across

countries.11 The number of firms per country, reported in column (1), varies significantly.

For example, the total number of firms in Columbia is 9 and in Japan it is 2,296. The

total number of groups is 1,070 comprised of 6,936 firms.12 The data shows that 43% of

all firms are part of a group, suggesting that the largest shareholder has equity ownership

in more than one firm in the sample. 12% of all groups are located in Japan, 10% in

Canada, 8.6% in the United Kingdom and 6.14% in Taiwan. Further investigations show

that 44% of all firms in the United Kingdom are in a group, similarly 90% in Japan, 56%

in Canada, 50% in the US and 20% in Taiwan.

The risk-taking measure, RISK, ranges from a low of 4.54% in Taiwan to a high of

13.83% in Australia. On average, the most levered firms as measured by book leverage

are in Thailand, Chile and Portugal.

Equity ownership of the largest shareholder also varies substantially across countries.

In Germany the average percent of shareholdings is 54.6, while in Japan it is only 10.33.

The correlation between the risk-taking variable (RISK) and ownership is 0.02% and it is

statistically significant (not tabulated). The correlation between RISK and anti-director

rights is 13%, and between RISK and creditor rights the correlation is negative -10%.

Table 2 presents the results of mean and median comparisons for a number of char-

acteristics of affiliated and non-affiliated firms. The first two columns show means and

medians for all firms. The average ownership stake of the largest shareholders is 25.82%

while the median is 15.2%. A fraction of large firms contribute to the discrepancy be-

tween mean and median size as reported in million dollars of net sales. The comparison

of affiliated and unaffiliated firms shows that the average equity ownership stakes are

15.83% and 33.6% respectively. Tests of the equality of mean and median ownership

stakes suggest that equity ownership is significantly higher in unaffiliated firms as com-

11The statistics do not include firms in the financial sector and firms with total assets smaller than$10 million. Also, the sample is restricted by the availability of data on anti-director and creditor rightsindexes.

12If a group is comprised not only of firms in which the shareholder has the largest stakes, but alsoincludes firms having stakes in companies that might not be ranked as the largest, then 80% of all firmsare in a group.

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pared to the affiliated ones. Unaffiliated firms are found to be more risky than the

affiliated ones. The size of affiliated firms as measured by net sales is significantly larger

than that for unaffiliated firms. In terms of profitability, the t-test of equally of means

indicates that affiliated and unaffiliated firms do not differ, however the sum-of-ranks

test indicates that unaffiliated firms are more profitable than the affiliated ones. Note

that this observation is in line with well documented evidence that diversified (affiliated)

firms are less profitable compared to stand-alone firms (Berger and Ofek (1995), Lang

and Stulz (1994) and Laeven and Levine (2007)).

The risk-adjusted measure of EBITDA/Assets is calculated by dividing the average

profitability measure EBITDA/Assets by the standard deviation of corporate earnings

(RISK). The the risk-adjusted returns are lower for the unaffiliated firms compared to

affiliated ones. The unaffiliated firms rely more on debt than the affiliated ones.

To describe groups, Table 3 shows statistics for various group-specific characteristics

that capture different aspects of group heterogeneity. Namely these measures are the

number of firms in a group, the number of ultimate owners (UO) in a group (at the 10%

level), the number of different business segments as measured by 2-digit SIC, and the

number of different countries in which firms operate. On average, a group is comprised

of almost 5.73 companies. Groups are operating in 3.9 distinct 2-digit SIC industries.

The average number of firms operating in different countries, a measure of international

diversification is 2, and the average number of ultimate owners, a measure of ownership

concentration in the group is 2.10.

The simple correlation matrix in Table 3 shows that risk is negatively related with

all diversification measures and positively related with ownership concentration captured

by the number of ultimate owners. The correlation between the average number of UO

in a group and all other diversification measures is weak suggesting that these measure

capture different aspects of diversification.

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3.3 Basic Regressions

Specification (1) allows to test the effect of ownership on corporate earnings volatility.

RISKi = αOwnershipi + βFirmControlsi + γInvestorProtectionc

+ ηCountryDummies + δIndustryDummies + εi, (1)

The dependent variable, RISK, is the standard deviation of country- and industry-

adjusted EBITDA/Assets of firm i. Ownership is percentage of direct and indirect

equity ownership of the largest shareholder. If the largest owner has less than 10%

ownership, the value is coded at zero.13 FirmControls includes logarithm of sales, book

leverage (short and long term debt over assets) and corporate earnings (EBITDA/Assets)

specified at the beginning of the sample period that is year 2003; InvestorProtection

includes country level indexes such as anti-director rights and creditor rights as reported

in La Porta et al. (1998). To estimate the above equation, OLS method with clustered

standard errors at the country level is applied. As shown in Table 1, the number of firms

per country differs substantially. To avoid the possibility that this particular sampling

feature affects the results, each individual firm observation is weighted with the inverse

of the number country observations (sampled firms) in a country.14

Risk and ownership might be jointly determined by common unobservable factors

which violates the consistency of the OLS estimator. As suggested by Demsetz and Lehn

(1985) ownership structure arises endogeneously within the firm. One way to address

this issue is to use an instrumental variable that is correlated with ownership structure

and uncorrelated with risk-taking. Potential candidate variable is the average ownership

of other firms in the same industry group and country.

To study how the group affiliation affects risk-taking, I augment equation (1) with a

group dummy variable and an interaction term of ownership and the group dummy:

13This modification is widely used in the literature (John et al. (2008), Faccio and Lang (2001)). Inthe robustness section a threshold of 20% is used. The results still hold.

14See John et al. (2008) and Khanna and Yafeh (2005) who use similar approach.

14

RISKi = α1Ownershipi + ρGroup + ξOwnershipi ×Group +

β1FirmControlsi + γ1InvestorProtectionc + η1CountryDummies +

δ1IndustryDummies + ε1i, (2)

Group takes the value one if a firm belongs to a group, and zero otherwise. A positive

ξ is expected if high level of stock ownership in affiliated firms increases risk-taking

compared to high level of ownership in unaffiliated firms. This specification is similar to

Khanna and Yafeh (2005), however it differs by incorporating ownership. In additional

(unreported) specifications, I include a set of group diversification measures to further

investigate how diversification and risk-taking are related (See Section 5.1).

It is recognized that firms that choose to participate in a group may not be a random

sample of firms. This is confirmed in the data by seeing differences between affiliated and

unaffiliated firms (Table 2). If a firm’s decision to diversivy is related to risk-taking, i.e.

if Group and ε1i are correlated, the Group estimate will be biased and inconsistent. To

address this issue, I first estimate Heckman self-selection model which explicitly models

the decision to diversify and incorporates its effect into the risk-taking regression. The

biases in the estimates ρ and ξ are attenuated. Second, I estimate two-stage model that

first takes into considerations the firm-specific factors that affect the average earnings and

then evaluates the impact of ownership on the risk-taking at the second stage. Third,

group fixed effects are used, assuming that all the unobserved heterogeneity leading to

correlation between the error term and Group variable is constant over time.

4 Risk-Taking: First Results

Regression specification (1) is in line with Laeven and Levine (2009) who examine 288

banks across 48 countries. By estimating similar regression on a sample of 13,489 non-

financial firms across 38 countries, I provide complimentary evidence of the effect of

ownership on risk-taking. This exercise sheds light on whether the relationship between

15

risk-taking and ownership is solely bank-specific as suggested by Laeven and Levine

(2009), or it is prevalent across a larger range of industries. In effect, the agency ar-

gument of present link between risk-taking and ownership is not constrained to bank

companies. The extension of the analysis to non-financial firms allows for more complete

understanding of this view.

Table 4, column (1), presents the estimates of regressions of country- and industry-

adjusted earnings volatility on ownership. In this specification ownership is defined as

an indicator variable taking the value of one for ownership stake higher than 10% and

zero otherwise. The coefficient on the ownership dummy indicates that the presence of a

shareholder with ownership larger than 10% has a positive and significant effect on firm

risk-taking. Firms with large shareholders exhibit 0.18% significantly higher earnings’

volatility than firms without such type of shareholders. In column (2), ownership is

specified as a linear variable. The positive relationship between risk-taking and ownership

is preserved—one standard deviation increase in ownership leads to 0.11% increase in

the risk-taking proxy. The estimates on sales, earnings and leverage behave as expected.

Larger firms and firms with initially higher earnings are associated with lower operating

risks.

The specifications in columns (3) to (7) add anti-director rights and creditor rights

indexes as defined by La Porta et al. (1998). John et al. (2008) outline a number of

arguments in support of either positive or negative relationship between risk-taking and

investor protection. Because investor protection and ownership concentration are sub-

stitutes, in countries with strong investor protection, corporations with risk-averse dom-

inant shareholders are expected to be less prevalent. This explains the negative relation

between risk-taking and investor protection. La Porta et al. (2000) provide different ar-

gument of why risk-taking might be lower in countries with strong shareholder rights.

To secure their private benefits, large shareholders abstain from taking risky projects. In

countries with strong investor protection, it might be more costly to secure these benefits

through passive corporate policies. This will force shareholderholder to switch from con-

servative risk-taking that secures private benefits to more aggressive risk-taking. Another

proxy for investor protection is the index of creditor rights. Acharya et al. (2008) propose

16

that stronger creditor rights make firms engage in risk-reduction. Their argument is that

stronger creditor rights induce greater liquidation costs to investors who in response will

seek to hedge this type of risk by taking low risk diversifying activities.

In column (3), the coefficient on the anti-director rights index takes a positive sign.

One standard deviation increase in shareholder rights as proxied by anti-director index

leads to 0.4% increase in risk-taking above its mean. Similar conclusion follows from

column (4) where the ownership is defined as a continuous variable. John et al. (2008)

include a richer set of investor protection indexes such as rule of law and accounting

disclosure standard. They also find a positive, but not always significant relationship

between anti-director rights and corporate risk-taking. Another recent study that ac-

counts for shareholders’ protection and bank risk-taking is by Laeven and Levine (2009).

The authors explain the lack of significant link between external ownership and regula-

tion with possible substitution between the availability of large shareholders and strong

investor protection (La Porta et al. (1999), Burkart et al. (2003)).

The coefficient on the creditor rights index is negative and significant in all specifi-

cation and suggests that a standard deviation increase in this index is associated with a

1.4% decrease in risk taking for column (3). The negative relationship between creditor

rights and risk-taking is in line with Acharya et al. (2008).15

In untabulated specification, I include a quadratic term of equity ownership as sug-

gested by Gadhoum and Ayadi (2003) and Wright et al. (1996). While the coefficient on

this term is negative and significant in the above mentioned studies, it is negative and

insignificant in the current specification. To exclude the possibility that the relationship

between ownership and risk-taking might be driven by parent-subsidiary tie, I exclude

the fraction of large shareholders than own more than 50% of a firm. The results are

preserved.

Column (4) presents results for the sample of firms having top shareholder with

more than 10% ownership. The rational for splitting the initial sample is to unveil any

potential correlation between large ownership and firm characteristics that might affect

15Laeven and Levine (2009) do not document a significant relationship between creditor rights andrisk-taking.

17

the estimate on ownership. In addition, this separation allows to investigate firms having

only a dominant shareholder at the 10% level and suppressing the role of managers.

Amihud and Lev (1981) posit that managers are trying to reduce their exposure to

firm risk, however, they will not be allowed to do in firms with dominant shareholders.

Unfortunately, due to the lack of information about managerial activity, I cannot infer

about the interplay between managerial and owner’s risk-taking. This result is also

consistent with the view that large shareholders, recognized to have incentives to monitor,

take more risky actions to potentially increase firm value (Shleifer and Vishny (1986)).

Columns (5) and (6) present results for the two largest class of shareholders: mutual

funds and families. Shareholders classified as mutual funds comprise 21% of the sample

and families comprise 22% of the sample. These two types of investors might have

different incentives for risk-taking. For example, it is well understood that families often

have incentives to take less risks in order to secure a firm’s long survival Anderson

et al. (2003). Consistently, with this view the results in column (6) do not confirm

any significant impact of ownership in risk-taking. On the other hand, mutual funds as

investment companies that target high returns and maintain well-diversified portfolios

are expected to take more risks. The results in column (5) show that the relation between

ownership and risk-taking is positive.16

Column (7) shows results of instrumental variable estimation. As in Laeven and

Levine (2009), firm ownership is instrumented with the average ownership of all other

firms operating in the same 2-digit SIC and the same country. It is not expected that

change in risk in one firm to affect the average ownership in an industry. The results show

that the instrument enters significantly the first stage. The Hausman test of endogeneity

confirms that the IV estimate of ownership is larger than the OLS estimate which suggests

that OLS understates the “true” effect of ownership on risk-taking.

This firm-level analysis suggests that large shareholders are taking greater risks as

measured by the standard deviation of firms country and industry adjusted corporate

earnings. The results provide complimentary evidence to earlier studies such as Laeven

16In untabulated specification, I exclude mutual funds and banks from the sample. The results remainthe same.

18

and Levine (2009), John et al. (2008), and Acharya et al. (2008). These studies do not

address whether large shareholders preserve their risk-taking tolerance if they hold a port-

folio of ownership stakes. Having shareholdings in more than one company is expected

to improve wealth diversification of large shareholders. The next section addresses this

issue.

5 Results: Group Affiliation

Table 5 presents results of the effect of group and ownership on risk-taking.17 The model

in column (1) is similar to those estimated in Section 4, however, it accounts for the

presence of group effect by including a group dummy and the interaction term between the

group dummy and the ownership stake of the largest shareholder. The dummy variable,

Group, equals one if a firm belongs to a business group and zero otherwise. The estimates

show that the coefficient on the group dummy is negative and significant. Firms affiliated

to a group enjoy 0.85% lower standard deviation of earnings than unaffiliated firms. This

result is similar to Khanna and Yafeh (2005) who examine twelve emerging markets

and interpret the negative effect of group on risk-taking as a form of risk-sharing. The

estimates of ownership and the interaction term between group affiliation and ownership

are of particular interest. The positive sign of the interaction term suggests that owners

with large stakes tend to advocate risk-taking only if they are in a group.

One-standard deviation increase in the percent of ownership in groups leads to 0.2%

marginal increase in risk-taking. One explanation of the positive marginal effect of own-

ership on risk-taking conditional on group participation is that shareholders are more

diversified in groups. Because diversified owners derive greater utility of risk-taking,

they are expected to be more prone to risky actions.

The coefficients on IntialSales, InitialBookLeverage and InitialEBITDA take the

expected signs. As in John et al. (2008) the coefficient on firm size measured by log sales

is negative and significant, indicating that large firms exhibit lower risk-taking. Similarly,

more initially more profitable firms are associated with lower risk-taking.

17All standard errors of the estimates are clustered at the country level. Clustering at the group leveldoes not affect the significance of the estimates.

19

I estimate the specification in column (1) separately for group affiliated and stand-

alone firms. The estimation with the partitioned sample removes biases that arise from

correlation between the group dummy and other controls. Columns (2) and (3) show

the estimates for group affiliated and stand-alone firms respectively. The estimates of

ownership clearly confirm that the positive link between ownership and risk-taking is

pertinent to the group-affiliated firms. On the contrary, ownership stakes and risk-taking

are negatively correlated for stand-alone firms.

Column (4) presents results for controlling shareholders defined at the 10% of own-

ership. They comprise 70% of the full sample. The effect of ownership on risk-taking

conditional on being in a group is valid only for controlling shareholders. This finding

suggests that diversification matters for risk-taking conditional on being a controlling

shareholder.

The presented results thus far imply that groups affect firm risk-taking in a simi-

lar way. It is possible, however, that group characteristics affect risk-taking differently.

Accounting for group characteristics might affect the results presented in Table 5. To

address these issues, I estimate specifications with three different proxies for diversifica-

tion: (i) corporate diversification is the number of different industry groups (two-digit

SIC industries) in which firms in the group operate;18 (ii) the second measure captures

geographical diversification by counting the number of different counties in which firms in

the group operate; (iii) the third measure captures the degree of ownership concentration

of the group and it is measured by the number of firms in which the largest shareholder

owns more than 10% equity.

All specifications include the group dummy and its interaction with the equity own-

ership. These estimates remain similar to the ones in column (1). For all specifications

the coefficient on the group affiliation remains negative and statistically significant, and

the coefficient on the interaction term with ownership is positive and significant.19 The

so-specified proxies for diversification do not affect risk-taking significantly, even though

all estimates take the expected signs.

18This measure is widely employed in the literature. See Martin and Sayrak (2003), Khanna and Yafeh(2005), Aggarwal and Samwick (2003), Denis et al. (2002) among others.

19The results are available upon request from the author.

20

5.1 Endogeneity Issues and Groups

The estimated models raise some econometric concerns. As pointed out by Campa and

Kedia (2002), Graham et al. (2002), Laeven and Levine (2007), and others, firm-specific

factors that drive the decision to be in a group might affect risk-taking. Thus, to evaluate

the effect of group diversification on risk-taking per se one has to control for the under-

lying factors that drive the group decision. Thus, group affiliation should be treated

as an endogeneous outcome that optimizes risk-taking, given a set of exogeneous de-

terminants of diversification. Evaluating the impact of group affiliation on risk-taking

therefore requires taking into account the endogeneity of the decision to hold shares in a

large number of companies.

To control for the endogeneity of the group affiliation decision, I take three steps.

First, I include a set of group fixed effects. The main idea behind this approach is to

control for unobserved and unchanging characteristics that are related to both the firm

controls and the risk-taking variable. Since, the size of groups varies substantially, from

2 firms in a group up to 300 firms, in order to account for the group fixed effect, I

focus only on a subset of groups that have more than 15 firms in a group (at the 90th

percentile). Column (5) in Table 5 presents the OLS estimation for that subsample

and column (6) shows the group fixed effect results. The signs of the coefficients on

all variables remain similar to the OLS estimates presented in Table 5, column (1). The

estimate on ownership decreases under the fixed effect as compared for the OLS, however,

it remains statistically significant. The smaller estimate suggests that group fixed effects

and ownership are correlated to some extent, but ownership affect risk-taking separately

from unobservable group heterogeneity.

Second, I estimate an endogeneous self-selection model using Heckman (1979) two-

step selection procedure. In the first step, I estimate a probit model of whether a firm

belongs to a group. The control variables in this specification are the fraction of groups in

an industry, industry size, industry and country dummies.20 These factors are assumed

20Campa and Kedia (2002) use the fraction of all conglomerate firms in an industry as a proxy forindustry attractiveness to account for diversification decisions and its impact on excess value. For asimilar approach, see Laeven and Levine (2007).

21

to affect group affiliation choice, but not a firm’s earnings volatility. In the second stage,

risk-taking is the dependent variable and the controls are firm characteristics and the

predicted probability of group participation. The estimates are presented in column (7)

in Table 5. The coefficient on ownership is positive and significant, and it is consistent

with that found in the previous specifications. The self-selection parameter, lambda is

negative and significant, which suggests that factors affecting the decision to be in a

group are negatively correlated with risk-taking.

The third test of endogeneity of group affiliation follows Khanna and Yafeh (2005).

For example, it might be the case that systematically firms with high profits share risks

with firms with low profits in the group. To account for this type of endogeneity, a two-

stage estimation is considered. At the first stage, I allow profitability to be determined

by firm characteristics and firm fixed effects. The second stage employs the standard

deviation of the residuals from the first stage as a dependent variable. In such a way only

the “unexplained” variation in profitability is explored. In addition to the controls from

the first stage, the group dummy and its interaction with ownership are included. This

approach, labeled by Khanna and Yafeh (2005) the conditional variance of profitability, is

quite intuitive. Unexplained changes in profitability are expected to be smaller for group-

affiliated firms. The results are presented in column (8) of Table 5. Though estimate on

the group dummy decreases in magnitude, it preserves the same negative and significant

sign. The interaction term between group and ownership is still positive and significant

which does not question the conclusion that the percent of ownership of the largest

shareholder in group-affiliated firms is positively linked to corporate risk-taking.

In sum, whether using fixed effects, two-stage estimation method, or self-selection

model, equity ownership by the largest shareholder is found to be positively related to

firm risk-taking.

6 Powerful Shareholders

Adams et al. (2005) posit that firms with powerful CEOs will have less extreme perfor-

mance because they have to compromise with other executives when they disagree, thus

22

achieving a diversification of opinions effect. In a similar spirit, Sah and Stiglitz (1991)

argue that performance is less variable when a greater number of executives make deci-

sions. This hypothesis might apply for external shareholders as well. Firms with a single

large shareholder might take more extreme decisions due to the lack of other shareholders

to oppose the decisions of the largest shareholder. Hence, concentrated ownership might

be associated with greater performance variability.

To test this hypothesis, I proxy for “shareholder power” by the differential in owner-

ship stakes between the first and the second largest shareholders. Large deviation signifies

the presence of more powerful first shareholder. The results in Table 6, columns (1)-(3),

show that shareholders’ power to influence decisions is positively associated with risk-

taking. This result is coming solely from the sample of affiliated firms (column (2)), which

suggests that power is related to group participation. Actually, outside of groups “pow-

erful” shareholders are decreasing firm variability. In the context of Adams et al. (2005),

this results implies that outside of groups a diversification of opinion effect is achieved.

It is difficult to believe that powerful shareholders can “smooth” their decision-making

reflected in less variable firm performance. This evidence rather suggests that powerful

shareholders have different incentives to take risk depending on group participation than

having diversified opinions.

7 Robustness Checks

7.1 Quantile Regressions

The results might be driven by outliers in the distribution of corporate earnings. To

address this possibility, I estimate a series of quantile regressions. The advantage of

quantile over ordinary least squares regressions is that the former permit the estimation

of the marginal effect of a covariate on risk-taking at various points of the distribution.21

21For detailed introduction of quantile regressions, see Koenker and Hallock (2001), and Buchinsky(1998).

23

Specifically, I run the following regression:

[ψ(µ), β(µ)] = arg minψ,β

∑

i

θµ(RISKi − βOwnershipi − ψControlsi)

where the coefficient β(µ) captures the quantile effect of ownership on risk-taking, θµ(u) =

u(µ− I(u < 0) and I(.) is an indicator function, Controlsi includes the same set of vari-

ables specified in equation (1). The estimation is conducted for µ = 0.25, 0.50, 0.75, 0.90.

Table 7 presents a series of quantile regressions of risk-taking on the set of controls as

specified in equation (1). The results in columns (1) to (4) refer to the group-affiliated

firms, and in columns (5) to (8) refer to the unaffiliated firms. For the affiliated firms,

ownership affects the whole distribution of the risk-taking measure (standard deviation

of corporate earnings over assets), however ownership influences little the top and the

bottom of the distribution. Columns (5)-(8) show that ownership does affect risk-taking

negatively, however, this result is (statistically) preserved only for the firms located at

the bottom of the risk-taking distribution of unaffiliated firms. This evidence explains

why significance of the negative estimate is not preserved for the specifications.

7.2 Subsamples

I investigate whether the results are preserved for different subsamples of firms. Pooling a

large set of countries, might mask heterogeneity across countries. In columns (1) to (2) of

Table 8, I exclude sequentially Japan, Canada as countries with high percentage of group-

affiliated firms. After excluding each country separately from the sample, the estimated

coefficients do not differ from the results of the full sample. In column (3), I exclude the

largest industry that is manufacturing. In column (4), I exclude shareholders classified as

mutual funds and banks. In columns (5) and (6) only financial firms are included. They

are excluded from all regression due to regulation on ownership and specific risk-taking

incentives that merit separate analysis. On average ownership is positively linked to risk-

taking. The estimate on the group dummy is negative and insignificant (column (6)).

Interestingly, ownership in groups is not positively linked to risk-taking, however outside

of group it is positively linked to risk-taking. The specification in column (7) includes

24

all firms and the ownership variable is coded at the 20% as opposed to 10%. The results

are preserved. The last column (8) omits the country specific anti-director and creditor

rights indexes which are not available for all countries in the sample. The increased

sample size does not affect the main estimates of ownership and group affiliation.

8 Conclusion

This study examines the relationship between ownership and corporate risk-taking. Us-

ing data from a large cross-country sample, I find that ownership and risk-taking are

positively related. This result, however, is preserved only for owners having sharehold-

ings in more than one company. These shareholders have diversified portfolios, which

allows them to pursue risks investment strategies. The results continue to hold after

controlling for endogeneity of group affiliation in several different ways. Legal protection

also plays a role in risk-taking. Countries with better protection of shareholder rights

seem to be associated with more risk-taking, while in countries with strong protection of

creditor rights corporate risk-taking is restrained.

This paper contributes to the literature on corporate risk-taking by analyzing own-

ership of the largest shareholder in non-financial companies and to the literature on

corporate diversification. I find that industrial, ownership and geographic diversification

in groups, all play risk-reduction role, however, the level of diversification does not affect

the positive effect of ownership on corporate risk-taking. This paper makes a contribu-

tion to the current debate on risk-taking triggered by the financial crisis that started in

mid-2007 by suggesting that equity ownership is a valid factor explaining at least part of

the risk-taking activity. More importantly, I find that equity ownership plays a role in

risk-taking only if owners are diversified and only if they controlling stakes.

Time-series investigation of the way risk-taking and ownership evolve would allow for

better understanding of the causes and consequences of risk-taking. Data limitations,

however, prevent me from addressing this issue.

25

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29

Table 1: Summary Statistics by CountryThe table shows the distribution of firms across countries and summary statistics of selected variablesfrom OSIRIS data over the period 2003-2006. RISK is the standard deviation of country- and industry-adjusted EBITDA/Assets. Book leverage is defined as short term debt plus long term debt over assets.EBITDA is earnings before interest, taxes, depreciation and amortization. Ownership is the percentageof equity stake of the largest shareholder in the firm.

Country Number Number RISK Book Sales EBITDA/ Own.Firms Firms in Groups Leverage Assets %

Argentina 42 13 6.83 32.91 646 14.44 40.14Australia 633 235 13.83 24.30 499 8.37 27.72Austria 49 8 5.45 26.65 859 9.74 53.58Belgium 90 11 5.96 26.51 1377 11.81 46.57Brazil 147 50 7.42 34.00 1398 14.35 45.14Canada 744 416 10.23 23.59 960 4.61 27.60Chile 118 48 4.13 35.06 711 11.54 51.10Colombia 9 3 6.88 26.15 587 8.58 46.27Denmark 98 21 7.59 25.92 922 9.57 34.98Egypt 92 65 5.98 29.07 195 13.94 52.49Finland 111 22 7.03 24.81 1429 11.57 30.36France 440 50 6.12 23.75 1454 9.61 50.29Germany 400 64 7.18 23.32 1814 9.49 54.60Greece 138 17 4.69 33.87 552 9.76 37.20Hong Kong 110 39 5.87 21.88 1051 9.72 36.86India 186 143 7.39 30.34 409 14.85 29.04Indonesia 416 67 5.72 38.12 219 10.24 35.13Ireland 50 23 7.13 28.42 1133 6.14 27.47Israel 105 47 7.80 20.12 431 4.55 24.35Italy 203 34 5.18 27.73 1468 8.78 39.27Japan 2,296 2,063 3.66 22.31 1576 8.75 10.33Malaysia 695 211 6.10 26.91 149 8.26 19.63Mexico 82 41 4.87 24.82 2480 13.76 23.82Netherlands 130 42 7.89 33.54 2733 11.40 33.92New Zealand 77 27 7.21 24.07 291 15.06 29.10Norway 151 37 7.27 29.63 860 9.73 35.61Pakistan 30 17 6.76 26.56 508 22.39 45.09Peru 17 4 9.05 25.78 351 18.04 47.41Portugal 44 8 5.83 40.70 1540 9.39 37.30Singapore 459 105 7.63 23.87 256 9.45 31.18South Africa 139 46 10.46 16.99 885 18.79 39.59Spain 101 23 7.65 28.06 2571 15.93 30.87Sweden 232 92 8.12 19.07 1298 7.40 32.93Taiwan 958 192 4.54 29.56 423 10.45 15.41Thailand 256 126 6.08 34.01 340 12.23 21.65Turkey 59 44 6.32 17.85 1374 15.07 27.01United Kingdom 1,110 487 8.38 22.72 1166 7.49 25.58US 3,979 1,995 9.57 22.08 1501 4.48 23.33

30

Tab

le2:

Des

crip

tive

Sta

tist

ics:

Com

par

ison

ofA

ffiliat

edan

dU

naffi

liat

edFir

ms

Affi

liate

dre

fers

tofir

ms

ina

grou

pw

hich

isde

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asa

colle

ctio

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firm

sha

ving

com

mon

larg

est

shar

ehol

der.

Ow

ners

hip

isth

epe

rcen

tage

ofeq

uity

stak

eof

the

larg

est

shar

ehol

der

inth

efir

m.

RIS

Kis

the

stan

dard

devi

atio

nof

coun

try

and

indu

stry

adju

sted

EB

ITD

A/A

sset

s.E

BIT

DA

isea

rnin

gsbe

fore

inte

rest

,ta

xes,

depr

ecia

tion

and

amor

tiza

tion

.Sa

les

isth

ene

tsa

les

(mill

ions

ofU

Sdo

llars

).R

isk-

adju

sted

EB

ITD

A/A

sset

sis

coun

try-

and

indu

stry

-adj

uste

dco

rpor

ate

earn

ings

over

RIS

K.B

ook

leve

rage

isde

fined

assh

ort

term

debt

plus

long

term

debt

over

asse

ts.

***

deno

tes

1%si

gnifi

cant

leve

l,**

deno

tes

5%si

gnifi

cant

leve

l,an

d*

deno

tes

10%

sign

ifica

ntle

vel.

Tot

alSam

ple

Affi

liat

edU

naffi

liat

edM

ean

Diff

.M

edia

nD

iff.

Mea

nM

edia

nM

ean

Med

ian

Mea

nM

edia

nt-

test

sum

-of-ra

nks

(1)

(2)

(3)

(4)

(5)

(6)

(5)-

(3)

(6)-

(4)

Ow

ner

ship

25.8

215

.215

.83

8.96

33.6

25.1

344

.29*

**52

.72*

**R

ISK

7.36

5.05

6.65

4.74

8.21

5.45

10.5

3***

12.8

5***

Sal

es10

3513

715

4029

5.99

781

100.

84-1

5.77

-28.

46E

BIT

DA

/Ass

ets

8.27

9.54

8.17

9.54

8.4

10.0

20.

852.

12**

Ris

k-a

dj.

EB

ITD

A/A

sset

s2.

932.

013.

22.

182.

721.

87-6

.53

-8.1

7B

ook

Lev

erag

e25

.37

22.5

922

.55

19.9

225

.923

.19.

26**

*9.

11**

*

31

Tab

le3:

Sum

mar

ySta

tist

ics

ofG

roup

Spec

ific

Char

acte

rist

ics

Gro

ups

are

defin

edas

ase

tof

firm

sha

ving

com

mon

larg

est

shar

ehol

der.

Num

ber

ofIn

dust

ries

(Cou

ntri

es)

indi

cate

sth

enu

mbe

rof

diffe

rent

indu

stri

es(c

ount

ries

)in

whi

chth

egr

oup

oper

ates

.N

umbe

rof

ulti

mat

eow

ners

(UO

)is

the

num

ber

offir

ms

ina

grou

pw

ith

mor

eth

an10

%ow

ners

hip.

RIS

Kis

the

stan

dard

devi

atio

nof

coun

try

and

indu

stry

adju

sted

corp

orat

eea

rnin

gs.

***

deno

tes

1%si

gnifi

cant

leve

l,**

deno

tes

5%si

gnifi

cant

leve

l,an

d*

deno

tes

10%

sign

ifica

ntle

vel.

Cor

rela

tion

Mat

rix

Mea

nM

edia

nSt.

Dev

.R

ISK

Num

ber

ofN

um

ber

ofN

um

ber

ofN

um

ber

ofFir

ms

inG

roup

Indust

ries

Cou

ntr

ies

UO

Withi

nG

roups

Num

ber

ofFir

ms

5.73

217

.85

-0.1

1N

um

ber

ofIn

dust

ries

3.91

25.

15-0

.13

0.95

1N

um

ber

ofC

ountr

ies

21

1.51

-0.0

90.

750.

751

Num

ber

ofU

O2.

202

3.46

-0.0

10.

380.

340.

131

32

Tab

le4:

Ris

k-T

akin

gR

egre

ssio

ns:

Bas

icSpec

ifica

tion

Thi

sta

ble

repo

rts

the

esti

mat

esfr

omO

LS

firm

-lev

elre

gres

sion

sof

corp

orat

eri

sk-t

akin

g(R

ISK

).G

roup

dum

my

equa

lson

efo

rfir

ms

affilia

ted

wit

ha

grou

p.O

wner

ship

>10

%is

anin

dica

tor

vari

able

taki

ngth

eva

lue

of1

for

owne

rshi

pgr

eate

rth

an10

%.

Ow

ner

ship

isth

epe

rcen

tage

ofeq

uity

stak

eof

the

larg

est

shar

ehol

der

inth

efir

m,c

oded

atze

roif

itis

smal

ler

than

10%

.E

BIT

DA

isea

rnin

gsbe

fore

inte

rest

,tax

es,d

epre

ciat

ion

and

amor

tiza

tion

divi

ded

byto

talas

sets

.Sa

les

isth

elo

gari

thm

ofne

tsa

les.

Boo

kle

vera

geis

defin

edas

shor

tte

rmde

btpl

uslo

ngte

rmde

btov

eras

sets

.A

llco

ntro

lsar

ere

trie

ved

for

the

year

ofen

try

inth

esa

mpl

e.A

DR

isan

ti-d

irec

tor

righ

tsin

dex

and

CR

isth

ecr

edit

orri

ghts

inde

x.C

olum

n(3

)in

clud

esA

DR

and

CR

,un

like

colu

mn

(2).

Col

umn

(4)

cove

rsth

esa

mpl

eof

firm

sw

ith

larg

est

shar

ehol

ders

havi

ngow

ners

hip

grea

ter

than

10%

.C

olum

n(5

)co

vers

the

sam

ple

offir

ms

wit

hth

ela

rges

tsh

areh

olde

rde

fined

asm

utua

lfun

d.C

olum

n(6

)co

vers

the

sam

ple

offir

ms

wit

hth

ela

rges

tsh

areh

olde

rde

fined

asfa

mily

.C

olum

n(7

)sh

ows

resu

lts

from

inst

rum

enta

lva

riab

lees

tim

atio

nth

attr

eats

owne

rshi

pas

endo

geno

usva

riab

le.

Clu

ster

edst

anda

rder

rors

are

repo

rted

inbr

acke

ts.

Eac

hfir

mob

serv

atio

nis

wei

ghte

dw

ith

the

inve

rse

ofth

enu

mbe

rof

firm

sfr

omit

sdo

mic

ileco

untr

y.**

*de

note

s1%

sign

ifica

ntle

vel,

**de

note

s5%

sign

ifica

ntle

vel,

and

*de

note

s10

%si

gnifi

cant

leve

l.

Con

tr.

Ow

ner

Mutu

alFunds

Fam

ily

IV(1

)(2

)(3

)(4

)(5

)(6

)(7

)O

wner

ship

>10

%0.

179*

[0.0

9]O

wner

ship

0.00

4**

0.00

5**

0.00

4*0.

004*

*0.

001

0.12

0***

[0.0

02]

[0.0

02]

[0.0

02]

[0.0

02]

[0.0

03]

[0.0

46]

AD

R0.

586*

**0.

578*

**0.

545*

**-0

.950

***

0.64

7**

[0.0

19]

[0.0

11]

[0.1

48]

[0.0

29]

[0.2

78]

CR

-1.5

74**

*-1

.388

***

1.08

0***

-0.8

72**

*-1

.213

**[0

.058

][0

.029

][0

.033

][0

.042

][0

.570

]In

itia

lSal

es-0

.636

***

-0.6

62**

*-0

.656

***

-0.5

75**

*-0

.548

***

-0.8

04**

*-0

.582

***

[0.0

14]

[0.0

22]

[0.0

25]

[0.0

19]

[0.0

44]

[0.0

44]

[0.0

72]

Init

ialE

BIT

DA

/Ass

ets

-0.1

85**

*-0

.181

***

-0.1

81**

*-0

.200

***

-0.2

43**

*-0

.200

***

-0.1

91**

*[0

.011

][0

.010

][0

.011

][0

.005

][0

.010

][0

.005

][0

.012

]In

itia

lB

ook

Lev

erag

e0.

005

0.00

70.

006

0.01

0***

0.01

0***

0.03

2***

-0.0

05[0

.004

][0

.004

][0

.004

][0

.002

][0

.004

][0

.006

][0

.006

]F-t

est

46.4

5***

Hau

sman

test

21.7

2***

Fir

ms

1348

613

244

1167

874

5928

6223

4411

910

R2

0.29

0.29

0.29

0.27

0.42

0.34

0.18

33

Tab

le5:

Ris

k-T

akin

gR

egre

ssio

ns:

Gro

up

Affi

liat

ion

Thi

sta

ble

repo

rts

the

esti

mat

esfr

omO

LS

firm

-lev

elre

gres

sion

sof

corp

orat

eri

sk-t

akin

g(R

ISK

).G

roup

isan

indi

cato

rva

riab

leth

ateq

uals

one

for

firm

saffi

liate

dw

ith

agr

oup

and

zero

othe

rwis

e.O

wne

rshi

pis

the

perc

enta

geof

equi

tyst

ake

ofth

ela

rges

tsh

areh

olde

rin

the

firm

,co

ded

atze

roif

itis

smal

ler

than

10%

.A

llco

ntro

lsar

ere

trie

ved

for

the

year

ofen

try

inth

esa

mpl

e.E

BIT

DA

/Ass

ets

isea

rnin

gsbe

fore

inte

rest

,ta

xes,

depr

ecia

tion

and

amor

tiza

tion

divi

ded

byto

tal

asse

ts.

Sale

sis

the

loga

rith

mof

net

sale

s.B

ook

leve

rage

isde

fined

assh

ort

term

debt

plus

long

term

debt

over

asse

ts.

AD

Ris

anti

-dir

ecto

rri

ghts

inde

xan

dC

Ris

the

cred

itor

righ

tsin

dex.

Col

umn

(4)

cove

rsa

subs

ampl

eof

firm

sha

ving

aco

ntro

lling

shar

ehol

ders

(ow

ner

ship

>10

%).

Col

umn

(5)

cove

rsa

subs

ampl

eof

Gro

ups

cons

iste

dof

ala

rge

num

ber

offir

ms,

OLS

esti

mat

ion.

Col

umn

(6)

cove

rsth

esa

me

subs

ampl

eas

inC

olum

n(5

),gr

oup

fixed

effec

tses

tim

atio

n.C

lust

ered

stan

dard

erro

rsar

ere

port

edin

brac

kets

.E

ach

firm

obse

rvat

ion

isw

eigh

ted

wit

hth

ein

vers

eof

the

num

ber

offir

ms

from

its

dom

icile

coun

try.

Cou

ntry

and

indu

stry

(one

-dig

itSI

Cco

de)

dum

mie

sar

eno

tre

port

ed.

***

deno

tes

1%si

gnifi

cant

leve

l,**

deno

tes

5%si

gnifi

cant

leve

l,an

d*

deno

tes

10%

sign

ifica

ntle

vel.

Full

Affi

liat

edN

otA

ffiliat

edC

ontr

.Ow

ner

sO

LS

Fix

edE

ffec

tsSel

f-Sel

ecti

onT

wo-

Sta

ges

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Gro

up

-0.8

54**

*-1

.515

***

-0.2

95*

[0.0

75]

[0.1

10]

[0.1

47]

Ow

ner

ship

-0.0

07**

*0.

007*

**-0

.006

***

-0.0

12**

*0.

074*

**0.

031*

*0.

009*

*-0

.005

[0.0

03]

[0.0

02]

[0.0

02]

[0.0

03]

[0.0

18]

[0.0

15]

[0.0

04]

[0.0

04]

Ow

ner

ship

*Gro

up

0.01

4***

0.02

6***

0.01

0*[0

.002

][0

.003

][0

.005

]In

itia

lsa

les

-0.5

89**

*-0

.586

***

-0.6

01**

*-0

.467

***

-0.6

57**

*-0

.738

***

-0.8

43**

*-0

.489

***

[0.0

13]

[0.0

16]

[0.0

16]

[0.0

17]

[0.1

07]

[0.0

63]

[0.0

91]

[0.0

73]

Init

ialE

BIT

DA

/Ass

ets

-0.1

87**

*-0

.168

***

-0.2

06**

*-0

.209

***

-0.0

79**

*-0

.092

***

-0.1

38**

*-0

.001

[0.0

12]

[0.0

22]

[0.0

06]

[0.0

05]

[0.0

19]

[0.0

08]

[0.0

07]

[0.0

03]

Init

ialB

ook

Lev

erag

e0.

005

0.00

50.

008*

*0.

008*

**0.

004

0.00

30.

012*

*-0

.084

***

[0.0

04]

[0.0

05]

[0.0

03]

[0.0

02]

[0.0

07]

[0.0

05]

[0.0

05]

[0.0

10]

AD

R0.

168*

**0.

194*

**0.

685*

**0.

563*

**0.

842*

**0.

299

0.15

51.

049*

**[0

.007

][0

.012

][0

.015

][0

.010

][0

.223

][0

.194

][0

.650

][0

.062

]C

R-0

.596

***

-0.2

81**

*-1

.667

***

-1.4

47**

*-0

.939

***

-0.6

17**

*-1

.293

-0.5

76**

*[0

.009

][0

.015

][0

.046

][0

.028

][0

.176

][0

.154

][1

.073

][0

.061

]Lam

bda

-3.4

6***

[1.0

7]Fir

ms

1163

057

2159

0974

2328

8528

8511

980

1115

3R

20.

290.

320.

260.

280.

190.

160.

30.

2

34

Table 6: Risk-Taking Regressions: Powerful ShareholdersThis table reports the estimates from OLS firm-level regressions of corporate risk-taking (RISK). Affili-ated firms have common largest shareholder. Ownership is the percentage of equity stake of the largestshareholder in the firm. Ownership2 is the percentage of equity stake of the second largest shareholder.Sales is the logarithm of net sales. EBITDA/Assets is earnings before interest, taxes, depreciation andamortization divided by total assets. Book leverage is defined as short term debt plus long term debt overassets. All controls are retrieved for the year of entry in the sample. ADR is anti-director rights indexand CR is the creditor rights index. Each firm observation is weighted with the inverse of the numberof firms from its domicile country. Clustered standard errors are reported in the brackets. Country andindustry (one-digit SIC code) dummies are not reported. *** denotes 1% significant level, ** denotes5% significant level, and * denotes 10% significant level.

Full Sample Affiliated Not Affiliated(1) (2) (3)

Ownership-Ownership2 0.004* 0.011*** -0.004**[0.002] [0.002] [0.002]

Initial Sales -0.631*** -0.590*** -0.602***[0.015] [0.014] [0.016]

Initial EBITDA/Assets -0.186*** -0.168*** -0.206***[0.011] [0.022] [0.006]

Initial Book Leverage 0.005 0.005 0.008**[0.004] [0.005] [0.003]

ADR 0.077*** 0.543*** 0.674***[0.007] [0.010] [0.013]

CR -0.431*** -1.229*** -1.655***[0.007] [0.045] [0.047]

Firms 11908 5712 5918R2 0.29 0.32 0.26

35

Tab

le7:

Ris

k-T

akin

g:Q

uan

tile

Reg

ress

ions

Thi

sta

ble

repo

rts

the

esti

mat

esfr

omqu

anti

lefir

m-lev

elre

gres

sion

sof

corp

orat

eri

sk-t

akin

g(R

ISK

).A

ffilia

ted

firm

sha

veco

mm

onla

rges

tsh

areh

olde

r.O

wne

rshi

pis

the

perc

enta

geof

equi

tyst

ake

ofth

ela

rges

tsh

areh

olde

rin

the

firm

,co

ded

atze

roif

itis

smal

ler

than

10%

.B

ook

leve

rage

isde

fined

assh

ort

term

debt

plus

long

term

debt

over

asse

ts.

EB

ITD

A/A

sses

tis

earn

ings

befo

rein

tere

st,ta

xes,

depr

ecia

tion

and

amor

tiza

tion

divi

ded

byto

tal

asse

ts.

Sale

sis

the

loga

rith

mof

net

sale

s.A

llco

ntro

lsar

ere

trie

ved

for

the

year

ofen

try

inth

esa

mpl

e.A

DR

isan

ti-d

irec

tor

righ

tsin

dex

and

CR

isth

ecr

edit

orri

ghts

inde

x.C

ount

ryan

din

dust

ry(o

ne-d

igit

SIC

code

)du

mm

ies

are

not

repo

rted

.B

oots

trap

ped

stan

dard

erro

rsar

ere

port

edin

brac

kets

.**

*de

note

s1%

sign

ifica

ntle

vel,

**de

note

s5%

sign

ifica

ntle

vel,

and

*de

note

s10

%si

gnifi

cant

leve

l.

Affi

liat

edFir

ms

Non

-Affi

liat

edFir

ms

25th

50th

75th

90th

25th

50th

75th

90th

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Ow

ner

ship

0.00

3**

0.00

3**

0.00

9*0.

006

-0.0

03**

-0.0

01-0

.002

-0.0

02[0

.001

][0

.001

][0

.004

][0

.006

][0

.001

][0

.003

][0

.004

][0

.004

]In

itia

lSal

es-0

.146

***

-0.2

61**

*-0

.607

***

-1.0

35**

*-0

.128

***

-0.3

05**

*-0

.594

***

-0.5

94**

*[0

.014

][0

.030

][0

.053

][0

.076

][0

.020

][0

.037

][0

.063

][0

.063

]In

itia

lE

BIT

DA

/Ass

ets

-0.0

55**

*-0

.086

***

-0.1

23**

*-0

.170

***

-0.0

72**

*-0

.114

***

-0.1

89**

*-0

.189

***

[0.0

01]

[0.0

04]

[0.0

08]

[0.0

16]

[0.0

02]

[0.0

04]

[0.0

08]

[0.0

08]

Init

ialB

ook

Lev

erag

e0.

001

0.00

1-0

.005

0.00

4-0

.003

**-0

.008

***

-0.0

11**

-0.0

11**

[0.0

01]

[0.0

02]

[0.0

05]

[0.0

07]

[0.0

01]

[0.0

03]

[0.0

05]

[0.0

05]

AD

R0.

595*

**0.

615

0.85

6-0

.095

0.51

1***

0.69

6***

1.15

4***

1.15

4***

[0.1

68]

[0.3

88]

[0.5

61]

[0.3

44]

[0.1

34]

[0.2

52]

[0.4

02]

[0.4

02]

CR

-1.1

19**

*-1

.171

*-1

.257

**-0

.442

-1.1

73**

*-1

.883

***

-2.5

78**

*-2

.578

***

[0.1

89]

[0.6

00]

[0.6

31]

[0.5

31]

[0.2

57]

[0.4

89]

[0.7

69]

[0.7

69]

Fir

ms

5781

5781

5781

5781

6034

6034

6034

6034

36

Tab

le8:

Ris

k-T

akin

gan

dO

wner

ship

:Subsa

mple

sT

his

tabl

ere

port

sth

ees

tim

ates

from

OLS

firm

-lev

elre

gres

sion

sof

corp

orat

eri

sk-t

akin

g(R

ISK

).G

roup

isan

indi

cato

rva

riab

leth

ateq

uals

one

for

firm

saffi

liate

dw

ith

agr

oup

and

zero

othe

rwis

e.O

wne

rshi

pis

the

perc

enta

geof

equi

tyst

ake

ofth

ela

rges

tsh

areh

olde

rin

the

firm

,co

ded

atze

roif

itis

smal

ler

than

10%

.B

ook

leve

rage

isde

fined

assh

ort

term

debt

plus

long

term

debt

over

asse

ts.

EB

ITD

A/A

sset

sis

earn

ings

befo

rein

tere

st,ta

xes,

depr

ecia

tion

and

amor

tiza

tion

divi

ded

byto

tala

sset

s.Sa

les

isth

elo

gari

thm

ofne

tsa

les.

All

cont

rols

are

retr

ieve

dfo

rth

eye

arof

entr

yin

the

sam

ple.

AD

Ris

anti

-dir

ecto

rri

ghts

inde

xan

dC

Ris

the

cred

itor

righ

tsin

dex.

Cou

ntry

and

indu

stry

(one

-dig

itSI

Cco

de)

dum

mie

sar

eno

tre

port

ed.

Stan

dard

erro

rsar

ere

port

edin

brac

kets

.In

colu

mn

(1)

Japa

nis

excl

uded

,in

colu

mn

(2)

Can

ada

isex

clud

ed,i

nco

lum

n(3

)m

anuf

actu

ring

isex

clud

ed,i

nco

lum

n(4

)la

rges

tsh

areh

olde

rsde

fined

asm

utua

lfun

dsor

bank

sar

eex

clud

ed,i

nco

lum

ns(5

)an

d(6

)on

lyfin

anci

alse

ctor

isin

clud

ed,i

nco

lum

n(7

)ow

ners

hip

isde

fined

atth

e20

%le

velof

cont

rolan

din

colu

mn

(8)

AD

Ran

dC

Rar

edr

oppe

d.**

*de

note

s1%

sign

ifica

ntle

vel,

**de

note

s5%

sign

ifica

ntle

vel,

and

*de

note

s10

%si

gnifi

cant

leve

l.

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Gro

up

-0.7

62**

*-0

.825

***

-0.8

19**

*-0

.752

***

-0.4

19*

-0.7

77**

*-0

.813

***

[0.0

97]

[0.0

61]

[0.0

73]

[0.0

66]

[0.2

27]

[0.0

62]

[0.0

71]

Ow

ner

ship

-0.0

06**

*-0

.005

**-0

.009

***

-0.0

040.

024*

**0.

023*

**-0

.005

***

-0.0

06**

*[0

.002

][0

.002

][0

.002

][0

.003

][0

.005

][0

.007

][0

.001

][0

.002

]O

wner

ship×G

roup

0.00

7***

0.00

8***

0.00

6*0.

010*

**-0

.005

0.01

2***

0.00

9***

[0.0

02]

[0.0

02]

[0.0

02]

[0.0

03]

[0.0

09]

[0.0

02]

[0.0

02]

Init

ialSal

es-0

.505

***

-0.5

21**

*-0

.628

***

-0.6

03**

*-0

.265

***

-0.2

52**

*-0

.532

***

-0.5

34**

*[0

.034

][0

.034

][0

.054

][0

.042

][0

.062

][0

.056

][0

.034

][0

.033

]In

itia

lE

BIT

DA

/Ass

ets

-0.2

17**

*-0

.209

***

-0.1

83**

*-0

.203

***

-0.1

08**

*-0

.109

***

-0.2

09**

*-0

.208

***

[0.0

04]

[0.0

11]

[0.0

12]

[0.0

09]

[0.0

20]

[0.0

20]

[0.0

11]

[0.0

11]

Init

ialB

ook

Lev

erag

e0.

008*

**0.

004

0.00

10.

020*

**-0

.030

***

-0.0

30**

*0.

005

0.00

5[0

.002

][0

.004

][0

.002

][0

.006

][0

.006

][0

.006

][0

.004

][0

.004

]A

DR

-0.2

09**

*0.

576*

**0.

459*

**0.

645*

**2.

212*

**2.

147*

**0.

571*

**[0

.008

][0

.019

][0

.015

][0

.011

][0

.077

][0

.081

][0

.017

]C

R0.

335*

**-1

.641

***

-1.7

59**

*-1

.491

***

-2.6

41**

*-2

.654

***

-1.6

37**

*[0

.010

][0

.067

][0

.062

][0

.063

][0

.085

][0

.090

][0

.068

]Fir

ms

9703

1139

180

4773

5711

1510

9311

829

1338

0R

20.

350.

360.

310.

350.

10.

10.

360.

36

37

Corporate Risk-Taking and Ownership Structure · review of various forms of ownership control mechanisms in corporations around the world. Dual-class shares, cross-ownership and pyramid

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