Outside Control and the 2007-2008 Financial Crisis

This paper is contributed to investigating the correlation between corporate governance of outside control and non-financial firms’ risk-taking preference. Surprisingly, the turnouts depart from the conventional wisdom of corporate governance of outside control we have learned before. In order to make the empirical investigation of the 2007-2008 financial crisis periods deliberately, our examinations are divided into two parts: pre-crisis and post-crisis. According to the post-crisis empirical results in this article, they indicate that those firms held by higher institutional ownership suffered serious losses and undertook higher default risk in the crisis years. Furthermore, the pre-crisis analysis suggests that the firms which performed worse are attributed to those institutional investors, the motivators, to affect firms significantly through aggressive and risky investing and high leverage financing policies before crisis years which led to those firms weaken and failure during the crisis period. In fact, the roles of disciplining and monitoring of institutional ownership are not fulfilled as we expected during the 2007-2008 financial crisis.