Essays on Downside Risk: Evidence from Board Diversity, CEO Traits, and Social Networks

This thesis emphasises the importance of downside risk, which refers to the potential for an experience of a loss in value or earnings, as a critical risk measure. It presents three essays that offer fresh perspectives on the relationships between corporate governance, social networks, and this type of risk, using comprehensive datasets of US-listed nonfinancial firms. The first essay examines the impact of board diversity on corporate downside risk using a multidimensional conceptualisation of diversity that includes cognitive and demographic factors using 29,481 firm-year observations from 3,286 unique firms (2006-2022). The essay finds that overall board and task-oriented diversity are negatively associated with both market-related and earnings-related downside risk. Relation-oriented diversity shows less consistent effects. Disaggregated analysis reveals that higher proportions of female directors and finance experts on boards reduce market downside risk, while nationality mix is negatively related to earnings downside risk. Importantly, task-oriented diversity components, such as finance expertise, board experience, and education level, emerge as more impactful than relation-oriented components in mitigating downside risk. The findings highlight the importance of a sophisticated, context-specific approach to board diversity for effective risk management. The second essay investigates the relationship between CEO gender, experience, power dynamics, and downside risk using 31,339 firm-year observations from 3,576 unique firms (2004-2022). Our findings support the conventional view that female CEOs are more risk-averse than their male counterparts, using the 2SLS model that addresses the concern of endogeneity. However, female CEOs’ role in reducing downside risk depends on the auditing firm type and diversity composition of the board. The risk-reducing benefits of female leadership are diminished when female CEOs hold certain types of power and experiences, potentially due to overconfidence bias and status concerns. The essay emphasises the importance of considering gender diversity, power distribution, and expertise among CEOs when assessing their impact on firm outcomes, particularly downside risk. The third essay explores the relationship between CEOs’ social networks and downside risk using 25,917 firm-year observations from 3,150 unique firms (2006-2022). The essay focuses on the CEO social network-to-board social network ratio as an indicator of the size of CEOs’ social networks and considers various downside risk measures. The findings reveal that a more extensive CEO social network, which can be understood as a form of social capital, is associated with lower market downside risk and earnings downside risk, suggesting a potential positive role of CEO social capital in mitigating corporate risk. It also shows that the size of CEOs’ social networks contributes to mitigating the asymmetric information between the firms and the market by reducing stock price synchronisation, indirectly mitigating corporate downside risk. The study also examines how the hedging activities, CEO gender, and diversity in the boardroom affect the relationship between CEO networks and firm risk, contributing to a comprehensive understanding of how CEO social networks influence downside risk in corporations. Several robustness analyses support the findings of this thesis. The findings of the thesis contribute significantly to corporate governance, social networks, and risk management literature. It offers novel insights into the complex relationships between board diversity, CEO characteristics, social networks, and downside risk. Importantly, the findings provide actionable insights for firms, enabling them to optimise their leadership structure and board composition to mitigate downside risk in their specific contexts effectively. The study also calls for reevaluating risk management tools to align with this refined understanding of risk, underlining the importance of a multidimensional approach to diversity, CEO characteristics, and social networks in developing risk mitigation strategies.<p></p>