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

Abstract

Purpose The purpose of this paper is to examine the association among operational risk incidents, corporate governance, credit risk and firm performance. Design/methodology/approach First, the authors regress corporate credit risk on the incurrence of operating losses (driven by operational risk events) and corporate governance variables. The purpose is 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, focusing on CEO duality, extent of independent board members, extent of foreign ownership and board member presence ratio. Findings The authors’ findings indicate that the higher level of operational risk incidents is linked to higher likelihood of credit default and to poorer performance. More importantly, the authors find that higher-quality corporate governance is associated with lower levels of operational risk incidents, better performance and lower likelihood of credit fault. Originality/value The authors use a rigid theoretical and empirical framework to examine the association among the incidents of operational risk, credit risk, corporate governance and firm performance. The authors’ study is important because it first facilitates understanding of causes leading to operational risk, and second if and how greater financial effects of operational risk negatively influences operating performance and credit risk of nonfinancial institutions in emerging markets.

The Parabolic Effect of Managerial Ownership and the Impact Toward Firm’s Performance

“…Business risk has a negative impact on a firm's performance which is caused by the volatility of revenue and is even worse when the volatility is showing a downfall trend (Ko et al, 2017). The negative impact of business risk on the firm's performance is consistent with the study of (Kahloul and Hallara, 2010;Saleh et al, 2016;Ko et al, 2017).…”

“…(Ho and Mohd, 2019) stated that when a firm is developing, the firm will earn some developments on market power, the economics of scale, and market experience which will in time increase the firm's performance. Furthermore, an increase of a firm's size plays a role in developing a firm's operational activities which will increase revenue and will finally increase the firm's performance (Ko et al, 2017). In accordance with what a firm will gain as it grows as stated above, the formulation of the hypothesis (H8): Firm's size has a positive impact on the firm's performance.…”

“…The positive impact of a firm's size on a firm's performance is caused by the development of market power, the economics of scale, and market experience along with the increase of the firm's size (Ho and Mohd, 2019). Besides that, an increase in a firm's size plays a role in developing a firm's operational activities (Ko et al, 2017) which in turn will increase the firm's performance. The result is consistent with the study of (Shyu, 2011;Ko et al, 2017;Ho and Mohd, 2019;Khan et al, 2019;Oyelade, 2019).…”

“…It is consistent with (Shan, 2017) and managerial utility maximization theory which states that when a firm grows, managers tend to make decisions to fulfill their interests and not to optimize profits, such as hiring more employees to help on his job but the additional employee doesn't really contribute to the firm's performance. Furthermore, uncertainty in the business environment causes the volatility of revenue and even worse causes business risk such as the firm's inability to meet its operational costs, and therefore an increase of business risk can reduce the firm's performance (Ko et al, 2017). Otherwise, the study of (Alshubiri, 2015) found which is when a firm experiences an increase of business risk, it will seek to overcome the risks by creating innovation and thus will result in an increase in the firm's performance from the new innovation that emerges during the crisis.…”

Financial Risk and its Performance: A Study on Apollo Food Holdings Berhad in Malaysia

“…In the financial industry many high-profile losses are due to operational risk. Before Basel II reforms to banking supervision, operational risk was largely a residual category for risks and uncertainties and not taken seriously (Ko, Lee, & Anandarajan, 2019).…”