Corporate Governance and Firm Risk in Australia

Abstract

This thesis, structured around three interrelated empirical essays, investigates the relationship of corporate governance with firm risks—default, stock liquidity, downside and upside—for a large sample of Australian listed firms (more than 1,000) over the period from 2001 to 2013. Seven reasons were found that make it imperative to empirically investigate such relationships: (i) a series of corporate collapses in early 2000s (such as HIH and OneTel) due to improper governance structures, (ii) a massive economic and social default cost to the stakeholders, (iii) a proliferated attention of regulators (Australian Securities Exchange [ASX] and related bodies) towards the development of a sound corporate governance environment, (iv) an increased concern of firms to comply with the ASX corporate governance recommendations, (v) an emphasis of the ASX on ‘risk’ while defining good corporate governance, (vi) a small amount of literature relating corporate governance to these risk factors in Australia, and (vii) a different corporate governance environment in Australia (i.e., ‘comply or explain’). The first empirical essay examines: Does corporate governance affect default risk? And does the relationship between corporate governance and default risk depend on growth opportunities and stock liquidity? This study extends the prior literature on the governance–default linkage as this is the first to show that composite corporate governance score is significantly relevant to the reduction of default risk in the Australian context.