1. Corporate governance and downside risk in Australia
SEARAT ALI S
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

2. Progress...Research output
Research papers
Ali, S., Liu, B., Su, J.J What determines stock liquidity in Australia?, Applied Economics, in press.
Ali, S., Liu, B., Su, J.J 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 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 What drives financial distress in Australia?, submitting in Applied Economics
Ali, S., Liu, B., Su, J.J 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 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
Australian Postgraduate Award (APA)
International Postgraduate Research scholarship (IPRS)
Griffith Business School top up scholarship

3. 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).

4. 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

5. 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

6. 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

7. 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?

8. 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

9. 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).

10. 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: ; 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

11. 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).

12. 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

13. 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

14. 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

15. 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)

16. 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

17. 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

18. 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

19. 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

20. Research Feedback
Q & A