Does good board governance reduce idiosyncratic risk in emerging markets? Evidence from China

This study examines the impact of board governance on idiosyncratic risk in the context of Chinese listed firms. Contrary to previous evidence from developed markets, we show that good board governance significantly reduces idiosyncratic risk in China. We also show that non -state-owned and foreign firms are relatively more capable of minimizing idiosyncratic risk than are state-owned and private firms. The empirical results obtained from CAPM are not sensitive to alternative proxies of idiosyncratic risk. We also find a significantly stronger impact of board governance on idiosyncratic risk after controlling for endogeneity and performing a sensitivity analysis. Our findings provide valuable insights into firm risk-taking behaviour in emerging markets.