CORPORATE GOVERNANCE, AUDIT QUALITY AND RISK TAKING IN THE U.S. PROPERTY CASUALTY INSURANCE INDUSTRY

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Chia-Ling Ho ORCID logo, Gene C. Lai, Jin-Ping Lee ORCID logo

DOI:10.22495/cocv7i1p8

Abstract

This paper examines the impact of corporate governance and audit quality on risk-taking in the U.S. property casualty insurance industry. The evidence shows that some corporate governance variables, as well as some audit quality variables are related to risk-taking. We find that longer board tenure is associated with low underwriting risk. But the higher percentage of financial experts on the board is associated with high underwriting risk. The possible reason is that financial experts possess a deep understanding of a firm’s financial situation and may encourage the management to take higher risk in anticipation of a higher return for a positive net present value project. The results are consistent with agency theory and wealth transfer hypothesis in that high risk taking is consistent with shareholder interest maximization. In addition, we find a non-monotonic relation between insider ownership and leverage risk. Finally, we do not find evidence that the Sarbanes-Oxley act have impact on the risk taking behavior.

Keywords: Corporate Governance, Audit Quality, Underwriting Risk, Leverage Risk, SOX Act

How to cite this paper: Ho, C., Gene, C. L. & Lee, J. (2009). Corporate governance, audit quality and risk taking in the U.S. property casualty insurance industry. Corporate Ownership & Control, 7(1), 84-95. http://doi.org/10.22495/cocv7i1p8