A firm’s appetite to take risk when exposed to a growth opportunity is vital to its

long-term performance. This article focuses on establishing relationships between

the level of equity ownership by different stakeholders with corporate risk taking.

This article identifies three different stakeholders of the firm namely corporate

insiders, blockholders (passive as well as active), and institutional investors and

their influence on the risk taking potential. The author put forward six hypotheses

and tried to test them empirically.

Primarily, the author cites different theories and their divergence in views about the

effect of the level of ownership by corporate insiders and their potential effect on

the risk taking ability of the firm. Various theories proposed that with an increase in

the level of ownership, corporate risk taking increases because the corporate

insiders wants to align their interests with that of the shareholders in order to

enhance their wealth. But some theories suggest that with an increase in insider’s

wealth in the firm, the risk appetite of the insider decreases since its wealth

becomes more concentrated. The author has cleverly linked it with diversification,

divestments, mergers and corporate restructuring strategies. The empirical studies

have also validated author hypothesis that the relationship between the level of

ownership and the corporate risk taking is positive till 7.5% and beyond that it

reduces.

The author then cited various theories validating the fact that the blockholders’ and

institutional investors exert heavy influence in the firm’s risk taking decisions when

provided with growth opportunities. Various theories assert that with an increase in

the level of ownership by blockholders and institutional investors, corporate risk

taking increases. However, the empirical results have invalidated the relationship

between blockholder and the corporate risk taking while validated the latter

relationship. This theory explains why there are altercations between managers and

stakeholders regarding various issues such as Mergers, when shareholders would

see firm’s growth potential, but managers aka corporate insiders would give

precedence to their own profitability depending upon the level of ownership they

hold in the firm. This is a typical example of agency costs problem.