||Economic Freedom, Corporate Governance, and Risk Taking Behavior: Evidence from the European Life Insurance Industry
||Institute of International Business
This study intends to examine two issues related to corporate governance and risk taking behavior in the life insurance industry. The corporate investment decision is made by CEO, but also influenced by shareholders and the board. The corporate governance is gauged by shareholder ownership concentration, CEO power (CEO’s ability to influence board decision), and the board size. Using a sample of 552 EU life insurers over 1995–2006 periods, consistent with the expectation, the results support that insurer’s risk taking behavior increases with firm-level corporate governance. High shareholder ownership concentration and CEO power negatively relate to country-level risk-taking. On the contrary, Board size has a positive relationship between country-level risk-taking.
Furthermore, this paper also provides some evidence that firms in high economic freedom countries have significant negatively relationship between country-level risk-taking behavior and shareholder ownership concentration. CEO power has no obvious difference in high or low economic freedom countries. With regard to board size, large board size would lead managers to undertake risky behaviors in high economic freedom countries, while smaller boards lead to a negative relationship between country-level risk-taking and board size in low economic freedom countries. Given that better corporate governance is instrumental to insurance risk-taking, firms in high economic freedom countries have more opportunities to take risk.
INSTITUTIONAL BACKGROUND 7
Insurance Environment in EU 7
The Insurance Guaranty Fund System 9
THE LITERATURE AND HYPOTHESIS DEVELOPMENT 10
Risk-taking Behavior 10
Corporate Governance and Risk-taking Behavior 16
Economic Freedom, Corporate Governance and Risk-taking Behavior 20
THE DATA, RESEARCH DESIGN, AND METHODOLOGY 25
Data Description and Diagnostics 25
Modal and Methodology 26
Measures of Risk-taking 27
Measures of Explanatory Variables 28
Measures of Economic Freedom 31
EMPIRICAL RESULTS 35
Descriptive Statistic and Correlation 35
Correlation Matrix 37
Firm-level Risk-taking Behavior and Corporate Governance 39
Country-level Risk-taking Behavior and Corporate Governance 42
The Effect of Economic Freedom on the Relationship between Firm-level Risk-taking Behavior and Corporate Governance 46
The Effect of Economic Freedom on the Relationship between Country-level Risk-taking Behavior and Corporate Governance 47
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