Common Ownership,Executive Incentive And Firm Risk Taking

Common ownership based on the same-industry joint shareholding by institutional investors is an important type of interfirm ownership linkages.Institutional common ownership is increasingly popular and widespread in today's capital market,making firms become more and more interconnected.However,the academic research about common ownership has just started.Common ownership can promote the efficiency of interfirm collaboration and cooperation,which have important implications for firm risk taking.Therefore,this study will systematically examine the economic consequences of common ownership from the perspective of firm risk taking.Using a sample of the Chinese A-share listed firms from the 2003 to 2015 period,this study finds that:(1)common ownership can promote the co-owned firms' risk taking,suggesting that interfirm ownership connections have positive impacts on firm risk taking activities;(2)high-level of executive compensation and stock ownership will weaken the promotion effect of common ownership on firm risk taking,implying that the interaction of external governance mechanism(i.e.,common ownership)and internal governance mechanisms(i.e.,executive compensation and stock ownership)can have a negative influence on corporate risk taking.The above findings are still firmly established after overcoming the possible key variable measurement problem,model clustering adjustment problem,missing variable problems,sample self-selection problem,reverse causality problem,and mutual causality problem.Furthermore,this study has conducted in-depth analysis form the perspectives of heterogeneity and economic consequences,and finds that:(3)compared with independent common ownership,non-independent common ownership plays a more significant role in enhancing co-owned firms' risk taking,suggesting that the potential business contacts between common investors and co-owned firms further enhance the influence power of common ownership on firm risk-taking;(4)both common ownership and corporate risk-taking can significantly increase the market value of co-owned firms.Moreover,corporate risk taking is an important intermediary path for common ownership to enhance the co-owned firms' market values.This finding can effectively integrate common ownership,risk taking,and firm values,thus deepening the understanding of the relationships and interactions among the three.This study has important theoretical contributions.This paper is the first one to explore the impact of common ownership on firm risk taking and thus make important contributions to various research fields,including interfirm networks and linkages,institutional investors,agency cost,and the interactions between internal and external governance mechanism.Moreover,this study also has important policy implications.Further deepening the reform of the capital market and creating a favorable investment environment for institutional investors will help achieve a higher level of common ownership in the capital market and thus promote the social economic welfare.