The effect of institutional environment and corporate governance on companies' risk-taking behavior

A country's institutional environment is an essential factor in determining the success of a companies' business development by influencing their risk-taking behavior. A companies' risk-taking tolerance level is adjusted with the institutional environment of their business scope, whether local or international. Corporate governance (CG) is another factor that affects companies' risk-taking behavior as shown in several studies. This study aims to determine what specific components of CG and the institutional environment influence risk-taking behavior most significantly. This paper examines the critical elements of institutional environments and CG that affect the risk-taking behavior of companies in Asian countries. It focuses on companies listed on the various Asian stock exchanges, totaling 12,123 companies in 13 countries. This study determines that the components of a firm's institutional environment that significantly affect its risk-taking behavior are the following: control of corruption, government effectiveness, regulations, and rule of law. In addition, this study finds that a firm's compensation policy as well as the integration of the firm's vision and mission play a significant role in the risk-taking behavior of companies. The findings give insight for companies to boost their performance by taking the significant CG components into account to manage their risk-taking behavior effectively. The results of this study are valuable for governments or regulators in understanding the elements of institutional environments in creating policies or regulations that are conducive to business. Companies that can rely on government and businesses environment support can promote foreign direct investment (FDI).