Governance and Finance
In recent decades, corporate governance no longer focuses on maximizing shareholder value but on balancing all stakeholders' interests. Corporate governance is then viewed more broadly as the nexus of rules, practices, and processes that determine the objective of a firm. Absent good governance, shareholders might realise inferior returns, creditors might lose interest payments, business partners might suffer from contract breaches, and employees might lose their future career opportunities (e. g., managers that used to work for Enron). High-quality governance ensures that all stakeholders' capital is effectively managed. Firms benefit from good governance in various ways, such as a higher valuation, a lower cost of capital, better talent attraction, and higher customer loyalty, for example.
The research group “Governance and Finance” studies traditional and modern views of corporate governance in financial markets and contributes to the literature in two ways. First, it contributes to understanding the effectiveness of different governance mechanisms' roles in talent selection, incentive, and retention. Individuals carry out corporate objectives, and good governance must ensure that the most qualified talent is allocated to the optimal position, exerts optimal effort, and stays with the firm. For example, the most important duty of the board of directors is to select, incentive, and retain the most talented/suitable CEO.
Second, this group also investigates how various forces in credit market impact corporate governance. Various stakeholders seek to influence corporate strategy differently with recent advances in the financial market. For example, the rise of common ownership might reduce firms' incentives to compete, the increase of active ownership might suddenly switch firms' investment strategies (i. e., shareholder activism), and the participation of shareholders in the credit market provides opportunities to internalise the shareholder-creditor conflicts. This group's research seeks to advance the knowledge of different stakeholders' methods and their effectiveness in influencing governance objects.
Workpackage 1: Talent Selection, Incentive, and Retention
Workpackage 2: Stakeholders and Governance
Research Cluster
Financial Resilience and RegulationYour contact
- Department Financial Markets
Refereed Publications
Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds
in: Journal of Financial and Quantitative Analysis, No. 3, 2017
read publicationWorking Papers
Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households
in: IWH Discussion Papers, No. 11, 2015
Abstract
This paper estimates relative risk aversion using the observed shares of risky assets and characteristics of households from the Household Finance and Consumption Survey of the European Central Bank. Given that the risky share is a fractional response variable belonging to [0, 1], this paper proposes a censored fractional response estimation method using extremal quantiles to approximate the censoring thresholds. Considering that participation in risky asset markets is costly, I estimate both the heterogeneous relative risk aversion and participation cost using a working sample that includes both risky asset holders and non-risky asset holders by treating the zero risky share as the result of heterogeneous self-censoring. Estimation results show lower participation costs and higher relative risk aversion than what was previously estimated. The estimated median relative risk aversions of eight European countries range from 4.6 to 13.6. However, the results are sensitive to households’ perception of the risky asset market return and volatility.
