ABSTRACT

Graham, Michael Appiah (2004). The impact of the board of directors, block holders, and institutional investors on corporate risk-taking. Acta Wasaensia No. 125, 148 p.

The thesis investigates the impact of the board of directors, block holders, and institutional investors on corporate or firm risk-taking. Corporate risk-taking is measured by three risk-taking variables: proxies for income stream risk, industry or strategic risk, and a risk measure based on stock returns. The empirical evidence presented in the thesis indicates that the board of directors relates differently to different risk-taking measures. The results indicate that the choice of risk-taking variables in studies involving the board of directors could influence the outcome of the study. Hence, reference should be made to the specific risk-taking variables used given that different risk measures may measure different aspects of risk-taking. Furthermore, in studying the relationship between corporate risk-taking and block holders and institutional investors, the thesis highlights the importance of decomposing the variables into different types of block and institutional owners to better understand their association. The evidence suggests that certain types of block and institutional owners can have a positive effect on risk-taking. The exact nature of the effect of the involvement of block and institutional owners depend on their characteristics, among other things. Therefore, it is important to be careful of general prescriptions concerning the level of involvement of block holders and institutional investors in corporate risk-taking. Most studies related to the issues investigated in this thesis have used US data. Given that many factors about firms, ranging from the nature of the board’s role to the risk of bankruptcy, vary by country (Gilson and Roe 1993, Roe 1994) and by firm size (Eisenberg, 1995), it is important to use data from other environments to generalise results of the relationships. Finnish data is, therefore, used in this study. This does not imply a replication of previous studies. The thesis builds on previous studies using data from a different environment, Finland. Also important, understanding the issues in the Finnish context contributes to the need for good corporate governance to be based on principles rather than prescription.

Michael Appiah Graham, Faculty of Business Studies, Department of Accounting and Finance, Graduate School of Finance and Financial Accounting, University of Vaasa, P. O. Box 700, FIN-65101 Vaasa, Finland.

Key words: Board of directors, block holders, institutional investors, risk-taking.