The impact of mandatory governance changes on financial risk management

The impact of mandatory governance changes on financial risk management

Ulrich Hege, Elaine Hutson, Elaine Laing

Series number :

Serial Number: 
552/2018

Date posted :

February 12 2018

Last revised :

February 02 2018
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Keywords

  • hedging • 
  • foreign exchange exposure • 
  • Sarbanes-Oxley act • 
  • Corporate governance • 
  • Board monitoring • 
  • staggered introduction

This paper uses the staggered adoption of the Sarbanes-Oxley Act of 2002 for a difference-in-difference identification of the impact of corporate governance on hedging. In a large panel of listed US firms, we focus on two indexes of the legally required governance reforms, but also a wide index of governance quality.

We find that the substantial improvements in governance standards robustly lead to less foreign exchange exposure and more foreign exchange derivatives hedging, and that the economic magnitude of the effect is large. Also, the adoption of mandatory governance measures is a stronger predictor of hedging than voluntary improvements. Dynamic panel GMM estimates confirm a significant positive relationship between governance quality and hedging.

Authors

Real name:
Elaine Hutson
Real name:
Elaine Laing