Mandatory Governance Reform and Corporate Risk Management

Mandatory Governance Reform and Corporate Risk Management

Ulrich Hege, Elaine Hutson, Elaine Laing

Series number :

Serial Number: 
552/2018

Date posted :

February 12 2018

Last revised :

April 22 2020
SSRN Share

Keywords

  • risk management • 
  • financial and operational hedging • 
  • foreign exchange risk • 
  • Sarbanes-Oxley act • 
  • Corporate Governance Reform • 
  • Board monitoring • 
  • Risk-Taking Incentives

We use the reform process of the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, and find that the substantial improvements in governance standards reduced foreign exchange exposure and increased derivatives hedging.

The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.
 

Authors

Real name:
Elaine Hutson
Real name:
Elaine Laing