Risk Committees and Implied Cost of Equity Capital

• DOI: http://doi.org/10.1111/irfi.12147
• Author: Hamdan Saif Al‐Jabri,Ahmed Al‐Hadi,Syed Mujahid Hussain,Khamis Hamed Al‐Yahyaee
• Date: 01 December 2018
• Published date: 01 December 2018

Risk Committees and Implied Cost of

Equity Capital

AHMED AL-HADI

†,‡

,SYED MUJAHID HUSSAIN

§

,

KHAMIS HAMED AL-YAHYAEE

§

AND HAMDAN SAIF AL-JABRI

‡

†

School of Accounting, Curtin Business School, Curtin University, Perth, Western

Australia, Australia,

‡

Department of Accounting, College of Economics and Political Science, Sultan Qaboos

University, Muscat, Sultanate of Oman and

§

Department of Economics and Finance, College of Economics and Political Science,

Sultan Qaboos University, Muscat, Sultanate of Oman

ABSTRACT

We investigate the association between the existence of risk committee and

implied cost of equity capital in a unique institutional setting where the

formation of the board risk committee as part of the risk governance

mechanism is not mandatory in the Gulf Cooperation Council (GCC)

financial institutions. Using data from the six GCC countries, we find that

implied cost of equity capital is negatively associated with the existence of

board risk committee. These findings indicate that GCC financial firms with

better risk governance practices at board level have lower implied cost of

equity capital. We contribute to the extant literature on-board risk governance

in emerging market context.

JEL Codes: G22; G30; G31; G32

Accepted: 18 July 2017

I. INTRODUCTION

The recent financial crisis of 2008–2009 has highlighted the importance of risk

management as part of the broader corporate governance mechanisms,

particularly in the financial institutions. The two most important internal risk

governance measures that support the comprehensive risk management

framework in financial institutions are the appointment of independent chief

risk officer (CRO) and establishment of the board’s risk committee (thereafter

RC). Accordingly, more recent research has focused on the association between

risk governance and firms’performance. For example, Aebi et al. (2012) find that

risk governance has a more significant effect on the performance of financial

firms than the standard corporate governance indicators, especially during the

financial crisis. Their findings suggest that banks, in which the CRO reports

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12147

International Review of Finance, 18:4, 2018: pp. 689–703

DOI:10.1111/ir .12147

© 2017 International Review of Finance Ltd. 2017