Corporate governance and downside risk in Australia SEARAT ALI S2863914 Griffith Business School Department of Accounting Finance and Economics Principal Supervisor: Dr Benjamin Liu and Dr Jen Je Su Associate Supervisor: Associate Professor Charles Qu Corporate Governance and Financial Markets November 25, 2015

Progress...Research output Research papers Ali, S., Liu, B., Su, J.J. 2016. What determines stock liquidity in Australia?, Applied Economics, in press. Ali, S., Liu, B., Su, J.J. 2016. Corporate governance and stock liquidity: Panel evidence from 2001 to 2013? Under review in Journal of Financial Markets. Ali, S., Liu, B., Su, J.J. 2016. Does corporate governance quality reduce financial distress? New panel evidence from 2001 to 2013, submitting in Journal of Banking and Finance Ali, S., Liu, B., Su, J.J. 2016. What drives financial distress in Australia?, submitting in Applied Economics Ali, S., Liu, B., Su, J.J. 2016. A risk-taking perspective of corporate governance: Does corporate governance has a differential effect on downside and upside risk? Targeting in Accounting and Finance Ali, S., Liu, B., Su, J.J. 2016. Women on board: does the gender diversity reduce default risk? Targeting in Journal of Corporate finance. Research grants 2015 American Finance Association (AFA) travel grant for annual meeting 2015 SIRCA’s pitching research symposium travel grant 2015 Griffith Graduate Research School (GGRS) travel grant 2014 Griffith Business School (GBS) travel grant 2013-2016 Australian Postgraduate Award (APA) 2013-2016 International Postgraduate Research scholarship (IPRS) 2013-2015 Griffith Business School top up scholarship

Progress...Networking and Presentation skills Conferences 23rd Conference on the Theories and Practices of Securities and Financial Markets (SFM), Taiwan, 11-12th December, 2015. 75th annual meeting of American Finance Association (AFA), Boston, USA, 2-5th January, 2015 27th Australasian Finance and banking conference, Sydney, Australia, 16-18th December, 2014. Symposiums Presented “Corporate governance and downside risk in Australia” at the Brown bag seminar on corporate governance and financial markets, Griffith University (December 2015) Discussed “Corporate governance practices and capital structure decision” at the brown bag seminar corporate governance and financial markets, Griffith University (December 2015) Discussed “Do Investors Value Firm Efficiency Improvement? Evidence from the Australian Context” at the Academic symposium, Griffith University (July 2015) Presented “The American Finance Association (AFA) meeting experience” at the PhD peer collaboration symposium, Griffith University (June 2015) Presented “Corporate Governance and the Stock Liquidity in Australia: A Pitch” at the SIRCA pitching symposium, SIRCA head office, Sydney (February 2015). Presented “The empirical investigation of corporate governance with risk taking, financial distress and bankruptcy in Australia” at Mid-year HDR symposium, Griffith University (July 2014).

Progress...Teaching with purpose Sessional tutor at Griffith University Postgraduate course Nathan campus: 7211AFE: Corporate Finance Semester 2, 2014 Average SET: 4.84 / 5.00 Sessional lecturer at Griffith University Undergraduate course Gold coast campus: 2206AFE: Investment Analysis and Management Semester 2, 2015 Average SET: 4.73/5.00

Presentation Plan Idea Data Tool Results Theoretical background Gap in literature Aim and potential contributions Data Sample Variable measurement Empirical model Tool Estimation methods Results Preliminary results

IDEA: Theoretical background Definition of corporate governance ASX Corporate Governance Council (2003) puts emphasise on risk and defines corporate governance as: “a system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risk involved” (pp. 03). Possible research avenue: Corporate governance, innovation(risk taking) and firm value http://corpgov.law.harvard.edu/2011/03/09/corporate-governance-and-innovation/

IDEA: Theoretical background Managers are risk averse It is widely recognized that managers have a natural tendency to engage in sub-optimal risk taking behaviour because of their pursuit of personal benefits and their undiversified human capital and concentration of wealth in the firms they control. Also, risk taking requires more efforts to manage new ventures and failure to manage risk may bring anxieties and pull managers out of their jobs (Wright, Ferris, Sarin, & Awasthi, 1996). Better CG encourages managers to take risk Effective governance in the first place is expected to encourage risk-averse managers to undertake risker but value enhancing and growth oriented investments (John, Litov, & Yeung, 2008). However, effective corporate governance in the second place should ensure the managers does not make wrong decisions or take excessive risk in order to avoid financial distress, and if the firm falls into financial distress, the effective corporate governance in the final phase should help the firm to avoid bankruptcy (Poletti‐Hughes & Ozkan, 2013). Which risk? Total risk? Upside risk? Downside risk?

IDEA: Theoretical background Downside Upside Negative Positive Scenario 1 Good governance reduces downside risk but increases upside risk Scenario 2 Scenarion1: Good governance reduces downside risk but increases upside risk Scenario 2: Good governance reduces both upside and downside risk Scenario 3: Poor governances increases both upside and downside risk Scenario 4: Poor governances increases downside risk but decreases upside risk Good governance reduces both downside risk and upside risk Scenario 3 Poor governance increases both downside risk and upside risk Scenario 4 Poor governance increases downside risk but decreases upside risk

IDEA: Literature background Corporate governance and risk taking No study in Australia (emphasis on risk; level performance) Many studies outside Australia Results are mixed. But why? Different and Individual CG variables (board size, independence, CEO duality, ownership structure) Risk taking proxies (total risk=systematic risk + idiosyncratic risk) Risk taking proxies (downside and upside risk?) Corporate governance and downside risk There is one study on corporate governance and downside risk in Taiwan. (What this study does: entire slide coming next) There is no study on corporate governance and downside risk in Australia (Why Australia)? Corporate governance, downside and upside risk There is no study on corporate governance and both upside and downside risk Despite of the emphasize on risk in defining corporate governance by ASX Corporate Governance Council, the prior Australian literature investigates the role of corporate governance with the level of firm performance but not with the variability of firm performance i.e. risk taking. In addition, the previous studies which investigate the relationship between corporate governance and risk taking outside Australia primarily focus on specific governance mechanisms, for instance, board size (Cheng, 2008; Nakano & Nguyen, 2012), board independence (Minton, Taillard, & Williamson, 2011; Ni & Purda, 2012), CEO dominance (Adams, Almeida, & Ferreira, 2005; Kim & Buchanan, 2011), ownership structure (Nguyen, 2011; Wright et al., 1996) and board structure (Pathan, 2009).

IDEA: Literature background Corporate governance and downside risk There is one study on corporate governance and downside risk in Taiwan. Major findings: Better corporate governance reduces downside risk Governance proxy: Focus on individual CG variables (managerial, institutional and block shareholdings; independent directors; competition). Risk proxy: Focus on only downside risk Sample: 2002-2012; 1,035 firms across 18 industries Generalizability concerns: Ownership structure is more important in Taiwan but internal governance mechanisms are more important in Australia. No treatment for Global financial crisis (GFC) Taiwan: Corporate governance is ownership structure Australia Corporate governance is board structure

IDEA: Aim and contributions of study Aim of the study We investigate the relationship between corporate governance and risk taking(downside and upside) in Australia. Contributions of the study First study in Australia on risk taking Comprehensive proxy of internal governance quality Classification of risk into downside and upside Horwath report Board quality Audit quality Nomination quality Remuneration quality External auditor independence Code of conduct and other disclosure policies Despite of the emphasize on risk in defining corporate governance by ASX Corporate Governance Council, the prior Australian literature investigates the role of corporate governance with the level of firm performance but not with the variability of firm performance i.e. risk taking. In addition, the previous studies which investigate the relationship between corporate governance and risk taking outside Australia primarily focus on specific governance mechanisms, for instance, board size (Cheng, 2008; Nakano & Nguyen, 2012), board independence (Minton, Taillard, & Williamson, 2011; Ni & Purda, 2012), CEO dominance (Adams, Almeida, & Ferreira, 2005; Kim & Buchanan, 2011), ownership structure (Nguyen, 2011; Wright et al., 1996) and board structure (Pathan, 2009).

Presentation Plan Idea Data Tool Results Theoretical background Gap in literature Aim and potential contributions Data Sample Variable measurement Empirical model Tool Estimation methods Results Preliminary results

DATA Sample Variable measurements Data sources Horwath dataset: 2001 to 2008 Extended dataset: 2001 to 2013 Variable measurements Corporate governance Horwath ratings (CG ranks and CG stars) Self constructed CG index Governance categories Risk taking Downside risk (HVAR, PVAR, CAR at 90, 95 and 99%) Upside risk ( UP and CUP 90%, 95%, 99%) Controls Size, age, leverage, profitability, growth, liquidity Data sources Horwath report, SIRCA, Morningstar Horwath ratings (CG ranks and CG stars) from public, Philip brown and Jim Pasaros Generalizability Size, time Implication categories, investors (subjective and scoring) Self constructed CG index internal programmer costing 300 dollars: Show sample Risk taking external programmer costing 450 dollars: Show sample>>>>>>>>>>>>allen and powel

Presentation Plan Idea Data Tool Results Theoretical background Gap in literature Aim and potential contributions Data Sample Variable measurement Empirical model Tool Estimation methods Results Preliminary results

Survivorship bias & GFC Tools Pooled OLS Robust SE Year effects Industry effects Endogeneity bias Fixed effects Lagged variable 2SLS and GMM Additional analysis Survivorship bias & GFC Sub indices Omitted variables Pooled OLS regression Endogeneity bias Unobserved heterogeneity: Fixed effect Reverse causality: Lagged independent variables Unobserved heterogeneity, measurement errors, and reverse causality: Instrumental variable approach and generalized method of moments (GMM)

Presentation Plan Idea Data Tool Results Theoretical background Gap in literature Aim and potential contributions Data Sample Variable measurement Empirical model Tool Estimation methods Results Preliminary results

Preliminary results Preliminary results.docx Corporate governance reduces downside risk Corporate governance reduces upside risk Corporate governance reduces total risk The results are robust to unobserved heterogeneity The results are robust to Horwath dataset (large firms only) Governance categories reduce risk taking Descriptive Year wise Industry wise T-statistics Correlation analysis

IDEA: Theoretical background Downside Upside Negative Positive Scenario 1 Good governance reduces downside risk but increases upside risk Scenario 2 Scenarion1: Good governance reduces downside risk but increases upside risk Scenario 2: Good governance reduces both upside and downside risk Scenario 3: Poor governances increases both upside and downside risk Scenario 4: Poor governances increases downside risk but decreases upside risk Good governance reduces both downside risk and upside risk Scenario 3 Poor governance increases both downside risk and upside risk Scenario 4 Poor governance increases downside risk but decreases upside risk

Presentation Plan Idea Data Tool Results Theoretical background Gap in literature Aim and potential contributions Data Sample Variable measurement Empirical model Tool Estimation methods Results Preliminary results

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