1. 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

2. 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?

3. 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

4. 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

5. 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?

6. 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?

7. 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.

8. 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