The Role of the Board in Corporate Risk Oversight

This paper investigates the role of the board in monitoring corporate risk. Proponents of riskrelated governance structures such risk committees or Enterprise Risk Management (ERM) programs contend that risk monitoring adds value by ensuring that corporate risks are managed. An alternative view is that such governance structures are nothing more than window-dressing in response to regulatory or public pressure. Consistent with the former view, I find that, in the period before the 2007-2008 financial crisis, firms with more observable risk oversight structures exhibit (i) lower idiosyncratic and systematic equity risk, (ii) lower credit risk, and (iii) less extreme performance than firms with fewer or no observable risk oversight structures. I also provide evidence that firms with more observable risk oversight structures experienced higher returns during the worst days of the recent financial crisis and were less susceptible to market fluctuations than firms with fewer or no observable risk oversight structures. Finally, I find that firms without observable risk oversight structures experienced higher abnormal returns to recent legislative events relating to risk management than firms with observable risk oversight structures.