Role of corporate governance in moderating the risk-return paradox: Cross country evidence

Abstract

This paper investigates the possible nexus between the ’risk-return paradox’ and corporate-governance of firms in a cross-country cross-cultural setup. We use corporate governance as well as accounting risk and return data for a large dataset of 45,322 firm years from 27 countries and show that the firm-level risk-return association may be a non-linear one, contingent on the firm performance. Firms which are below the industry median in terms of operating performance, exhibit an inverse relation in line with Bowman’s (1980) ‘paradox’ while those above-median exhibit a positive risk-return associations. Further, we establish empirically that such risk-return association could be due to the rent-seeking actions of managers and that strong corporate-governance in a firm substantially moderates and reverses these effects. Our results are robust and hold strong through a number of robustness tests.