Major shareholders’ trust and market risk: Substituting weak institutions with trust

This study examines the impact of foreign controlling shareholder trust on firm market risk using two measures of total and idiosyncratic risk. An extensive global sample of 12,496 firm-year observations from 43 countries is employed. The results show that firms controlled by foreign trusting shareh...

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Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2021-02, Vol.66, p.101784, Article 101784
Main Authors: Abdelsalam, Omneya, Chantziaras, Antonios, Batten, Jonathan A., Aysan, Ahmet Faruk
Format: Article
Language:English
Subjects:
Controlling shareholder
Market risk
Return stability
Trust
Volatility
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Summary:This study examines the impact of foreign controlling shareholder trust on firm market risk using two measures of total and idiosyncratic risk. An extensive global sample of 12,496 firm-year observations from 43 countries is employed. The results show that firms controlled by foreign trusting shareholders display lower levels of risk in both market measures. Trust appears more important for firms based in countries with a less favourable institutional environment, whereby it varies with the investment horizon of foreign controlling shareholders. The results are robust after controlling for cultural measures, endogeneity, selection bias and alternate model specifications. •The impact of foreign controlling shareholder trust on firm market risk is examined.•Two measures of market risk are employed: total and idiosyncratic risk.•Firms controlled by trusting foreign shareholders display lower levels of market risk.•The effect of foreign shareholder trust strengthens for firms located in weak institutional contexts.•Long-term oriented foreign shareholders from high-trust countries reduce firm market risk.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2020.101784