Discussion by Ron Masulis Vanderbilt University Enterprise Risk Management and Financial Stability in Dual-Board Corporate Governance System by Wu, Li, Ding and Jia Discussion by Ron Masulis Vanderbilt University

Key Questions: Do dual-boards of Chinese firms affect total and systematic risk taking or are their activities affected by this risk taking? Does board activity measured by meetings frequency affect firm risk taking? Do regular boards affect firms differently than supervisory boards?

Basic Approach Relate Firm Risk Taking to the Two Boards Meeting Frequency Control for ownership structure of large blocks, government shareholdings, board characteristics, management characteristics and firm characteristics Use a 4-Stage Least Squares Regressions 1st Stage: Instruments for regular board and supervisory board meetings frequencies 2nd Stage: Uses fitted values from 1st stage to resolve simultaneity of regular and supervisory board meetings frequencies and firm risk 3rd Stage: Uses residuals from the 2nd stage to adjust for unobservable heterogeneity 4th Stage: Uses the fitted values from the 3rd stage to resolve simultaneity of meeting frequency and firm total and systematic risk Examines subsamples of firms: subperiod and yearly analysis, high and low leverage, top, middle and low risk firms, government is or is not a controlling shareholder, and analyzes changes in meeting frequencies

Major Findings Both the regular board and the supervisory board affect firm risk taking Frequency of regular board meetings significantly raises firm systematic and total risk Frequency of supervisory board meetings significantly lowers firm total risk, but does not affect systematic risk The study argues that these two results are consistent with more meetings improving corporate governance

Important Unexplored Question How is the supervisory board appointed? What are supervisory board powers? Can the supervisory board fire the CEO or the regular board of directors? What are the powers of the regular board of directors? Are board meeting frequencies correlated with firm size?

Suggestions Title is not very informative! A more descriptive alternative would be: Corporate Governance and Risk Taking in China Consider adding an analysis of residual risk Study implicitly assumes that meeting frequency raises board monitoring; it would be helpful to provide some further evidence to support this assumption The risk focus ignores the potential benefits in terms of expected returns. What about the risk – return tradeoff?

Critical Questions Can total risk and systematic risk be analyzed independently of each other? How good are the study’s instruments? They are very significantly correlated with the variables they are meant to instrument for But are they uncorrelated with the risk measures? This is a crucial question that needs to be directly addressed. If the instruments fail the exclusion requirement, then the results are suspect. Could rising meeting frequency be related to weakening firm performance, which results in rising risk? Some further exploration of this question is needed.

Ways to Improve Explanatory Variables Concerns about some of the current variables: Why isn’t capital gains plus dividends scaled by beginning of period stock price? We want it to be independent of firm size Replace number of independent directors with % (more standard) Isn’t CEO turnover likely to be endogenous? Allow for firm performance measures to have asymmetric effects Potentially important added control variables: Indicator for a board with one or more large blockholder representative directors Percentage shareholdings of largest non-government blockholder CEO tenure Indicator of non-government blockholder holding majority control