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Showing papers on "Leverage (finance) published in 2012"


Journal ArticleDOI
TL;DR: This article studied the behavior of money, credit, and macroeconomic indicators over the long run based on a new historical dataset for 14 countries over the years 1870-2008 and found that credit growth is a powerful predictor of financial crises, suggesting that policymakers ignore credit at their peril.
Abstract: The financial crisis has refocused attention on money and credit fluctuations, financial crises, and policy responses. We study the behavior of money, credit, and macroeconomic indicators over the long run based on a new historical dataset for 14 countries over the years 1870-2008. Total credit has increased strongly relative to output and money in the second half of the twentieth century. Monetary policy responses to financial crises have also been more aggressive, but the output costs of crises have remained large. Credit growth is a powerful predictor of financial crises, suggesting that policymakers ignore credit at their peril. (JEL E32, E44, E52, G01, N10, N20)

1,451 citations


Journal ArticleDOI
TL;DR: In this article, the authors characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets, and establish the robustness of their insights when the set of optimal regulations is set.
Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of

1,124 citations


Journal ArticleDOI
TL;DR: The authors found that banks with more shareholder-friendly boards performed significantly worse during the crisis than other banks, were not less risky before the crisis, and reduced loans more during crisis, while large banks from countries with more restrictions on bank activities performed better and decreased loans less.

876 citations


Journal ArticleDOI
TL;DR: In this paper, the authors proposed an empirical methodology to measure systemic risk of a financial institution with its contribution to the deterioration of the system capitalization that would be experienced in a crisis.
Abstract: This paper proposes an empirical methodology to measure systemic risk. We associate the systemic risk of a financial institution with its contribution to the deterioration of the system capitalization that would be experienced in a crisis. In order to measure this empirically we introduce the SRISK index, the expected capital shortage of a firm conditional on a substantial market decline. The index is a function of the degree of Leverage, Size and Marginal Expected Shortfall (MES) of a firm. MES is the expected loss an equity investor in a financial firm would experience if the market declined substantially. To estimate MES, we introduce a dynamic model for the market and firm returns. The specification is characterized by time varying volatility and correlation as well a nonlinear tail dependence. The empirical application to a set of top U.S. financial firms between 2000 and 2010 is used to illustrate the usefulness of the methodology. Results show that SRISK provides useful ranking of systemically risky firms at various stages of the financial crisis: one year and a half before the Lehman bankruptcy, nine companies out of the SRISK top ten turned out to be troubled institutions. The aggregate SRISK of the financial system provides early warning signals of distress in the real economy: a one standard deviation shock in aggregate SRISK predicts a twentyfive basis points drop in Industrial Production over the next month.

672 citations


Journal ArticleDOI
TL;DR: In this article, the authors examine how the institutional environment influences capital structure and debt maturity choices of firms in 39 developed and developing countries and find that firms in more corrupt countries and those with weaker laws tend to use more debt, especially short-term debt; explicit bankruptcy codes and deposit insurance are associated with higher leverage and more longterm debt.
Abstract: This study examines how the institutional environment influences capital structure and debt maturity choices of firms in 39 developed and developing countries. We find that a country's legal and tax system, corruption, and the preferences of capital suppliers explain a significant portion of the variation in leverage and debt maturity ratios. Specifically, firms in more corrupt countries and those with weaker laws tend to use more debt, especially short-term debt; explicit bankruptcy codes and deposit insurance are associated with higher leverage and more long-term debt. More debt is used in countries where there is a greater tax gain from leverage. © 2012 Michael G. Foster School of Business, University of Washington, Seattle, WA 98195.

651 citations


Journal ArticleDOI
TL;DR: A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and signicant predictors of financial crises, regardless of whether a country is emerging or advanced.
Abstract: A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and signicant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis.

564 citations


Journal ArticleDOI
TL;DR: In this article, the authors document the puzzling evidence that, from 1962 to 2009, an average 10.2% of large public non-financial U.S. firms have zero debt and almost 22% have less than 5% book leverage ratio.
Abstract: We document the puzzling evidence that, from 1962 to 2009, an average 10.2% of large public non-financial U.S. firms have zero debt and almost 22% have less than 5% book leverage ratio. Zero-leverage behavior is a persistent phenomenon. Dividend-paying zero-leverage firms pay substantially higher dividends, are more profitable, pay higher taxes, issue less equity, and have higher cash balances than control firms chosen by industry and size. Firms with higher CEO ownership and longer CEO tenure are more likely to have zero debt, especially if boards are smaller and less independent. Family firms are also more likely to be zero-levered.

383 citations


Journal ArticleDOI
TL;DR: In this paper, a large sample of covenant violations reported by U.S. public firms is used to show that violations are followed immediately with an increase in CEO turnover, an increased in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a sharp reduction in leverage and shareholder payouts.
Abstract: We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. Using a large sample of covenant violations reported by U.S. public firms, we show that violations are followed immediately with an increase in CEO turnover, an increase in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a sharp reduction in leverage and shareholder payouts. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making. In addition, changes in the management of violating firms suggest that creditors exert considerable behind-the-scenes influence on governance in addition to contractual control. We also show that firm operating and stock price performance improve following a violation, suggesting that actions taken by creditors benefit shareholders.

372 citations


Journal ArticleDOI
22 Mar 2012
TL;DR: This paper found that highly leveraged homeowners had larger declines in spending between 2007 and 2009 than other homeowners, despite having smaller changes in net worth, suggesting that their leverage weighed on consumption above and beyond what would have been predicted by wealth effects alone.
Abstract: The recent plunge in U.S. home prices left many households that had borrowed voraciously during the credit boom highly leveraged, with very high levels of debt relative to the value of their assets. Analysts often assert that this “debt overhang” created a need for household deleveraging that, in turn, has been depressing consumer spending and impeding the economic recovery. This paper uses household-level data to examine this hypothesis. I find that highly leveraged homeowners had larger declines in spending between 2007 and 2009 than other homeowners, despite having smaller changes in net worth, suggesting that their leverage weighed on consumption above and beyond what would have been predicted by wealth effects alone. Results from regressions that control for wealth effects and other factors support the view that excessive leverage has contributed to the weakness in consumption. I also show that U.S. households, on the whole, have made limited progress in reducing leverage over the past few years. It may take many years for some households to reduce their leverage to precrisis norms. Thus, the effects of deleveraging may persist for some time to come.

325 citations


Journal ArticleDOI
TL;DR: This paper showed that banks that relied more on short-term funding, had more leverage, and grew more are more likely to perform poorly in both financial crises, and that persistence in a bank's risk culture and/or aspects of its business model made its performance sensitive to crises.
Abstract: Are some banks prone to perform poorly during crises? If yes, why? In this paper, we show that a bank's stock return performance during the 1998 crisis predicts its stock return performance and probability of failure during the recent financial crisis. This effect is economically large. Our findings are consistent with persistence in a bank's risk culture and/or aspects of its business model that make its performance sensitive to crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.

313 citations


Journal ArticleDOI
TL;DR: In this paper, the authors show that leverage aversion changes the predictions of modern portfolio theory: safer assets must offer higher risk-adjusted returns than riskier assets, and that consuming the high risk adjusted returns of safer assets requires leverage, creating an opportunity for investors with the ability to apply leverage.
Abstract: The authors show that leverage aversion changes the predictions of modern portfolio theory: Safer assets must offer higher risk-adjusted returns than riskier assets. Consuming the high risk-adjusted returns of safer assets requires leverage, creating an opportunity for investors with the ability to apply leverage. Risk parity portfolios exploit this opportunity by equalizing the risk allocation across asset classes, thus overweighting safer assets relative to their weight in the market portfolio.

Journal ArticleDOI
TL;DR: In this paper, the authors present a theory of financial intermediary leverage cycles within a dynamic model of the macroeconomy, where risk-based funding constraints that give rise to procyclical leverage.
Abstract: We present a theory of financial intermediary leverage cycles within a dynamic model of the macroeconomy. Intermediaries face risk-based funding constraints that give rise to procyclical leverage. The pricing of risk varies as a function of intermediary leverage, and asset return exposure to intermediary leverage shocks earns a positive risk premium. Relative to an economy with constant leverage, financial intermediaries generate higher consumption growth and lower consumption volatility in normal times, at the cost of endogenous systemic financial risk. The severity of systemic crisis depends on intermediaries’ leverage and net worth. Regulations that tighten funding constraints affect the systemic risk-return trade-off by lowering the likelihood of systemic crises at the cost of higher pricing of risk.

Journal ArticleDOI
TL;DR: This paper examined whether three tax system characteristics (required book-tax conformity, worldwide versus territorial approach, and perceived strength of enforcement) impact corporate tax avoidance across countries after controlling for firm-specific factors previously shown to be associated with tax avoidance.
Abstract: We examine whether three tax system characteristics—required book-tax conformity, worldwide versus territorial approach, and perceived strength of enforcement—impact corporate tax avoidance across countries after controlling for firm-specific factors previously shown to be associated with tax avoidance (i.e., performance, size, operating costs, leverage, growth, the presence of multinational operations, and industry) and for other cross-country factors (i.e., statutory corporate tax rates, earnings volatility, and institutional factors). We find that, on average, firms avoid taxes less when required book-tax conformity is higher, a worldwide approach is used, and tax enforcement is perceived to be stronger. However, the relations between tax avoidance and all three tax systems characteristics are contextual and depend on the extent to which management compensation comes from variable pay, including bonuses, stock awards, and stock options. Data Availability: Data are available from sources ident...

Journal ArticleDOI
TL;DR: The authors found that firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout, and that subsequent debt reductions are neither rapid nor the result of pro-active attempts to rebalance the firm's capital structure towards a long run target.
Abstract: Firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout. Subsequent debt reductions are neither rapid, nor the result of pro-active attempts to rebalance the firm’s capital structure towards a long-run target. Instead, the evolution of the firm’s leverage ratio depends primarily on whether or not the firm produces a financial surplus. In fact, firms that generate subsequent deficits tend to cover these deficits predominantly with more debt even though they exhibit leverage ratios that are well above estimated target levels. While many of our findings are difficult to reconcile with traditional capital structure models, they are broadly consistent with a capital structure theory in which financial flexibility, in the form of unused debt capacity, plays an important role in capital structure choices.

Journal ArticleDOI
TL;DR: In this paper, the authors review the last two decades of research in dynamic corporate finance, focusing on capital structure and the financing of investment, and present a minimalist, simplified presentation with a great deal of intuition.
Abstract: We review the last two decades of research in dynamic corporate finance, focusing on capital structure and the financing of investment. We first cover continuous time contingent claims models, starting with real options models, and working through static and dynamic capital structure models. We then move on to corporate financing models based on discrete-time dynamic investment problems. We cover the basic model with no financing, as well as more elaborate models that include features such as costly external finance, cash holding, and both safe and risky debt. For all the models, we offer a minimalist, simplified presentation with a great deal of intuition. Throughout, we show how these models can answer questions concerning the effects of financial constraints on investment, the level of corporate leverage, the speed of adjustment of leverage to its target, and market timing, among others. Finally, we review and explain structural estimation of corporate finance models.

Posted Content
TL;DR: In this article, the macroeconomic implications of financial frictions are surveyed and the market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement.
Abstract: This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.

Journal ArticleDOI
TL;DR: In this article, the authors consider the role of arbitrageurs in maintaining accurate prices during normal times and offer an estimate of discounts at which assets transact during crises, and the time required to correct them.

Journal ArticleDOI
TL;DR: In this paper, the authors test whether the amount and/or quality of financial statement information affects the financial structure of small and medium-sized enterprises (SMEs). Belgian SMEs are used, because there are important differences in disclosure and audit requirements among them.
Abstract: We test whether the amount and/or quality of financial statement information affects the financial structure of small and medium-sized enterprises (SMEs). Belgian SMEs are used, because there are important differences in disclosure and audit requirements among them. Consistent with the traditional view that asymmetric or incomplete information restricts access to external funds, our results indicate that both the amount and quality of financial statement information are positively related to SME leverage. In addition, we find that leverage is positively related to asset structure, growth (prospects) and median industry leverage, and negatively related to firm age and profitability.

Posted Content
TL;DR: A network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage is developed, and it is shown how it can be understood in terms of a generalized branching process.
Abstract: Common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis. We develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage, and we show how it can be understood in terms of a generalized branching process. By studying a stylized model we estimate the circumstances under which systemic instabilities are likely to occur as a function of parameters such as leverage, market crowding, diversification, and market impact. Although diversification may be good for individual institutions, it can create dangerous systemic effects, and as a result financial contagion gets worse with too much diversification. Under our model there is a critical threshold for leverage; below it financial networks are always stable, and above it the unstable region grows as leverage increases. The financial system exhibits "robust yet fragile" behavior, with regions of the parameter space where contagion is rare but catastrophic whenever it occurs. Our model and methods of analysis can be calibrated to real data and provide simple yet powerful tools for macroprudential stress testing.

Journal ArticleDOI
TL;DR: In this article, the authors investigated the link between firm size and risk-taking among financial institutions during the period of 1998-2008 and made three contributions: 1) They found that size is positively correlated with risk taking measures even when controlling for other observable firm characteristics, which is consistent with the notion that too-big-to-fail policies distort the risk incentives of financial institutions.
Abstract: We investigate the link between firm size and risk-taking among financial institutions during the period of 1998-2008 and make three contributions. First, size is positively correlated with risk-taking measures even when controlling for other observable firm characteristics. This is consistent with the notion that “too-big-to-fail” policies distort the risk incentives of financial institutions. Second, a simple decomposition of the primary risk measure, the Z-score, reveals that financial firms engage in excessive risk-taking mainly through increased leverage. Third, we find that bank corporate governance measured as the median director dollar stockholding has a substantial impact on reducing firms’ risk-taking.

Journal ArticleDOI
TL;DR: In this paper, a dynamic panel threshold model of capital structure is developed to test the dynamic trade-off theory, allowing for asymmetries in firms' adjustments toward target leverage.

Journal ArticleDOI
TL;DR: In this article, the authors test the predictions of Titman (1984) and Berk, Stanton, and Zechner (2010) by examining the effect of leverage on labor costs and find that leverage has a significantly positive impact on CEOs' cash, equity-based, and total compensation.
Abstract: We test the predictions of Titman (1984) and Berk, Stanton, and Zechner (2010) by examining the effect of leverage on labor costs. Leverage has a significantly positive impact on CEOs’ cash, equity-based, and total compensation. Compensation of new CEOs hired from outside the firm is positively related to prior-year firm leverage. In addition, leverage has a positive and significant impact on average employee pay. The incremental total labor expenses associated with an increase in leverage are large enough to offset the incremental tax benefits of debt. The empirical evidence supports the theoretical prediction that labor costs limit use of debt.

Journal ArticleDOI
TL;DR: In this article, the FOSTER School of Business at the University of Washington published a paper entitled "Foster Business School: A Review of the Foster Program."
Abstract: COPYRIGHT 2012, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195

Journal ArticleDOI
TL;DR: The authors found that the average firm that repatriated under the act did not increase investment following repatriation, even after controlling for the availability of funds to repatriate, and found little change in employment, leverage, or disbursements to shareholders.
Abstract: Do publicly traded firms forego valuable investment opportunities because they have insufficient capital to fund those projects? This is an important question in finance and has public policy implications. Many of the previous studies have been plagued with the difficulty of distinguishing the role of insufficient capital with the extent to which investment opportunities were available. The enactment of the American Jobs Creation Act (AJCA) allows an opportunity to more cleanly answer this question than has been available to prior researchers. Our results show that the average firm that repatriated under the act did not increase investment following repatriation. However, those firms who we measure as most likely to have been under funding investment prior to the act’s passage saw significant increases in investment beyond those firms that did not participate in the act and beyond those that did participate but that were not financially constrained. This is true even after we control for the availability of funds to repatriate. We find little change in employment, leverage, or disbursements to shareholders following repatriation, even among the financially constrained firms.

Journal ArticleDOI
TL;DR: In this paper, the authors studied the full equilibrium dynamics of an economy with financial frictions and found that risk is endogenous and asset price correlations are high in down turns, making the system more prone to systemic volatility spikes.
Abstract: This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplification effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in down turns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other and the economy by not maintaining adequate capital cushion.

Journal ArticleDOI
Galo Nuño1, Carlos Thomas1
TL;DR: In this article, the authors document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period and build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts.
Abstract: We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so.

Journal ArticleDOI
TL;DR: The authors examined the role of capital constraints in firms' investment decisions and found that a majority of the funds repatriated by capital constrained firms were allocated to approved domestic investment, while unconstrained firms account for a large majority of repatriated funds.
Abstract: The American Jobs Creation Act (AJCA) significantly lowered US firms' tax cost when accessing their unrepatriated foreign earnings. Using this temporary shock to the cost of internal financing, we examine the role of capital constraints in firms' investment decisions. Controlling for the capacity to repatriate foreign earnings under the AJCA, we find that a majority of the funds repatriated by capital constrained firms were allocated to approved domestic investment. While unconstrained firms account for a majority of repatriated funds, no increase in investment resulted. Contrary to other examinations of the AJCA, we find little change in leverage and equity payouts.

Journal ArticleDOI
TL;DR: In this article, the authors build a simple model of leveraged asset purchases with margin calls and show that if a downward price fluctuation occurs while one or more funds is fully leveraged, the resulting margin call causes them to sell into an already falling market, amplifying the downward price movement.
Abstract: We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called ‘value investing’, i.e. systematically attempting to buy underpriced assets. When funds do not borrow, the price fluctuations of the asset are approximately normally distributed and uncorrelated across time. This changes when the funds are allowed to leverage, i.e. borrow from a bank, which allows them to purchase more assets than their wealth would otherwise permit. During good times, funds that use more leverage have higher profits, increasing their wealth and making them dominant in the market. However, if a downward price fluctuation occurs while one or more funds is fully leveraged, the resulting margin call causes them to sell into an already falling market, amplifying the downward price movement. If the funds hold large positions in the asset, this can cause substantial losses. This in turn leads to clustered volatility: before a crash, when the value funds are dominant, they damp volatility, and after the crash, when they suffer severe losses, volatility is high. This leads to power-law tails, which are both due to the leverage-induced crashes and due to the clustered volatility induced by the wealth dynamics. This is in contrast to previous explanations of fat tails and clustered volatility, which depended on ‘irrational behavior’, such as trend following. A standard (supposedly more sophisticated) risk control policy in which individual banks base leverage limits on volatility causes leverage to rise during periods of low volatility, and to contract more quickly when volatility becomes high, making these extreme fluctuations even worse.

Journal ArticleDOI
TL;DR: This paper examined the impact of financial flexibility on the investment and performance of East Asian firms over the period 1994-2009 and found that firms with financial flexibility can attain financial flexibility through conservative leverage policies and less commonly by holding large cash balances.
Abstract: This study examines the impact of financial flexibility on the investment and performance of East Asian firms over the period 1994-2009 We employ a sample of 1,068 firms and place particular emphasis on the periods of the Asian crisis (1997-1998) and the recent credit crisis (2007-2009) The results show that firms can attain financial flexibility, primarily through conservative leverage policies and less commonly by holding large cash balances Financial flexibility appears to be an important determinant of investment and performance, mainly during the Asian 1997-1998 crisis In particular, firms that are financially flexible prior to this crisis (i) have a greater ability to take investment opportunities, (ii) rely much less on the availability of internal funds to invest, and (iii) perform better than less flexible firms during the crisis Our analysis covering the credit crisis period of 2007-2009 suggests that some of the advantages of flexible firms towards investing persist but are significantly less pronounced over that period We also find that the value of financial flexibility is region/country specific, which may be explained by the fact that different regions/countries often adopt different macroeconomic policies and operate in diverse economic/legal environments

Journal ArticleDOI
Chia-Jane Wang1
TL;DR: In this article, the authors investigate the relevance of board size and firm's risky policy choices and find that companies with smaller boards take lower leverage but more risky investment, suggesting that small boards give CEOs larger incentives and force them to bear more risk than larger boards.
Abstract: The main purpose of this paper is to investigate the relevance of board size and firm’s risky policy choices. I find that both the managerial pay to performance sensitivity (delta) and the managerial pay to firm risk sensitivity (vega) are negatively related to board size, suggesting that small boards give CEOs larger incentives and force them to bear more risk than larger boards. While controlling for the effects of managerial compensation schemes on corporate investment policy and financing policy, I find that companies with smaller boards take lower leverage but more risky investment. Finally, after controlling for the effects of financial decisions on overall firm risk, I find that companies with smaller boards are associated with higher future risk. This supports the hypothesis that board size has negative impact on firm’s risk taking. My results are robust to various estimation methods that control for endogeneity and panel dynamics.