The impact of operational risk incidents and moderating influence of corporate governance on credit risk and firm performance

• Date: 04 March 2019
• DOI: https://doi.org/10.1108/IJAIM-05-2017-0070
• Published date: 04 March 2019
• Pages: 96-110
• Author: Chiungfeng Ko,Picheng Lee,Asokan Anandarajan
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

The impact of operational risk

incidents and moderating influence

of corporate governance on credit

risk and firm performance

Chiungfeng Ko

Department of Accounting, Soochow University, Taipei, Taiwan

Picheng Lee

Department of Accounting, Pace University, New York, New York, USA, and

Asokan Anandarajan

School of Management, New Jersey Institute of Technology, Newark,

New Jersey, USA

Abstract

Purpose –The purpose of this paper is to examine the association among operational risk incidents,

corporategovernance, credit risk and firm performance.

Design/methodology/approach –First, the authors regress corporate creditrisk on the incurrence of

operating losses (driven by operational risk events) and corporate governance variables. The purposeis to

test the correlation between operational risk, corporate governance and credit risk. Second, in the authors’

next regression, the authors’dependent variable is firm performance, and the independent variable is

operational risk and corporate governance to test the correlation between operational risk, corporate

governance and firm performance. In this study, the authors measure corporate governance using four

surrogates, focusingon CEO duality, extent of independentboard members, extent of foreign ownership and

board memberpresence ratio.

Findings –The authors’findings indicate that the higher level of operational risk incidents is linked to

higher likelihoodof credit default and to poorer performance. More importantly,the authors find that higher-

quality corporategovernance is associated with lower levels of operationalrisk incidents, better performance

and lower likelihoodof credit fault.

Originality/value –The authors use a rigid theoretical and empirical framework to examine the

association among the incidentsof operational risk, credit risk, corporate governance and firm performance.

The authors’studyis important because it first facilitates understandingof causes leading to operational risk,

and second if and how greater financial effects of operational risk negatively influences operating

performanceand credit risk of nonfinancial institutions in emerging markets.

Keywords Corporate governance, Firm performance, Credit risk, Operational risk

Paper type Research paper

1. Introduction

Risk management and corporate governance issues are currently influencing public policy

debates on risk controls[1].Bhimani (2008) stated that companies seek not only to adopt risk

control but also to make the deploymentof those controls visible and transparent.By visible

and transparent, he means that theapplication of those controls can be seen to be operating

clearly and without impediment. Hence, the link between management accounting, risk

IJAIM

27,1

96

Received26 May 2017

Revised2 September 2017

4 December2017

Accepted10 December 2017

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 1, 2019

pp. 96-110

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-05-2017-0070

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