The relationship between risk and return (systematic and extraordinary) of stocks with the tenure of the company's board of directors

Dissertation for Master's degree (M.A)

Field:

Accounting

Abstract

In this research, the risk and return (systematic and extraordinary) of stocks on the tenure of the company's board of directors is discussed. One of the elements of the corporate governance structure is the board of directors. Shareholders use the two components of risk and return to evaluate the performance of managers. Therefore, the performance of the organization and its corresponding risk are important to the shareholder's decisions regarding the tenure of the company's board of directors in order to achieve the highest return. In this research, a sample consisting of 125 companies in the form of 15 industries during the 6-year financial period from the fiscal year 2017 to 2018, considering the same conditions for all member companies of the Tehran Stock Exchange, and also to test the hypotheses of The multivariable regression model using fixed effects and random effects method with mixed data approach has been used. The results indicate that there is a direct and significant relationship between systematic risk and the tenure of the board of directors, and there is an inverse and significant relationship between systematic return and the tenure of the board of directors, while there is no significant relationship between risk and extraordinary returns and the tenure of the board of directors.

Keyword: extraordinary risk, extraordinary return Extraordinary, the tenure of the board of directors.

1 Introduction

Risk and return as two important components in the investment environment are always considered in all financial decisions and the exchange of these two components offers various investment combinations. On the one hand, investors seek to get the most income from investment, and on the other hand, they are faced with the conditions of uncertainty prevailing in the financial markets, which makes the achievement of investment income uncertain. Therefore, all investment decisions are made based on the relationship between risk and return. In today's highly competitive and uncertain world, the behavior of managers and, as a result, the control performance of the board of directors in the face of risk is one of the success factors in making decisions. The formation of a limited liability company and the opening of company ownership to the public had a significant impact on the way companies are run. to assign According to Jensen and Meckling (1976), the separation of ownership from management in large companies led to the emergence of agency theory. This theory is related to a case where one person (the owner) delegates the responsibility of making decisions regarding the distribution of financial and economic resources or performing a service to another person (broker) through a specific contract (Moradi and Saeedi, 2013).

The formation of an agency relationship is accompanied by conflicting interests that occur as a result of the separation of ownership from management, different goals and asymmetry of information between managers and shareholders (Day, 2008). To ensure Sufficient supervision and care must be taken to fulfill the responsibility of economic enterprises in front of the public and interested parties. The implementation of supervision and care in this field requires the existence of appropriate mechanisms. Among these mechanisms, the design and implementation of appropriate corporate governance in companies and economic enterprises. Corporate governance is a set of internal and external control mechanisms of the company that determines how and by whom the companies are managed. The corporate governance system that maintains a balance between social and economic goals and individual collective work, encourages the efficient use of resources. Paying attention to effective corporate governance and increasing efficiency in contracts between stakeholders in order to strengthen the culture of accountability of companies and to promote transparency of information in companies and economic units that all or part of their capital is provided through people leads to the efficient allocation of resources and ultimately economic growth. In order to support group and individual interests, all claimants and beneficiaries of the company are considered (Hasan and But, 2009). The most basic and important mechanism of corporate governance is the board of directors. which has been discussed a lot in the literature of corporate governance and in developed and emerging countries (Qalibaf and Rezaei, 2016). Therefore, in the meantime, the position of the company's board of directors as a guiding body that has the role of monitoring and supervising the decision-making process in order to preserve the ownership interests of shareholders, is becoming more and more important.

1-2 statement of the problem

The stock returns of companies are affected by many internal factors or economic, psychological, political and other factors. These factors can be divided into micro and macro factors. According to William Sharp's model, stock returns are affected by micro and macro factors (Darabi and Ali Farahi, 2019). The micro factors mean the issues related to the internal companies, which are generally under the control of the managers of the companies. At the macro level, economic, political, social and cultural factors that are not under the control of the management, affect the stock returns of the companies. These micro and macro factors lead to fluctuations in the returns, which make the market environment associated with uncertainty about obtaining returns, which is called risk. Therefore, one of the effective factors in choosing investments and financial decisions of economic enterprises is the investors' attention to risk and investment returns. They try to invest their financial resources in a place that has the highest return and the lowest risk. Therefore, in addition to focusing on profit, companies must also manage risk as a limiting factor in maximizing returns. Therefore, risk and return are two sides of the same axis, which are guided by the representatives of shareholders to achieve the best performance of the organization. According to agency theory, agency costs are created following the separation of ownership and management of the company. In fact, the shareholders entrust the management of the company to the management, and if the management makes decisions and acts contrary to the main goal of the company, which is to maximize the wealth of the shareholders, the shareholders will bear agency costs. Meanwhile, companies are established with the aim of maximizing the wealth of the shareholders. According to Jensen (1986), the manager seeks to secure his personal interests. Therefore, it leads to a waste of organizational resources and, as a result, leads to agency costs. Since the attitudes of managers and owners are not aligned, conflicts of interest arise between these groups. According to this theory, in order to reduce agency conflicts, appropriate control methods must be established in the organization. Corporate governance (governance system) is one of the main factors for improving economic efficiency, which includes a set of relationships between company management, board of directors, shareholders, and other interested groups (Darabi and Ali Farhi, 2019). The management system of the company provides a structure through which the goals of the company are set and the means of achieving the goals and monitoring the performance are determined. This system creates the necessary motivation to achieve the company's goals in the management and provides effective supervision. In this way, companies use resources more effectively (Hass Yaganeh and Raisi, 2018). One of the elements of the corporate governance structure is the board of directors. The board of directors of the companies, who always play a role as the representatives of the shareholders as a link between them and the managers and are responsible for accountability and accountability to them, as a key element of an organization, they play a fundamental role in the performance of the companies. Therefore, the performance of the organization and the subsequent risk on the shareholder's decisions regarding the tenure of the board of directors and managers of the companies in order to achieve the highest efficiency will be a subject that can be explored. Also in the previous research conducted by Genter and Kaplan [1] (2006), the results indicate that the tenure of the board of directors is sensitive to both aspects of performance (systematic [2] and extraordinary [3]).

The basic element in deciding to retain or remove the board of directors is to evaluate the hidden abilities of the board members according to the organization's performance and its corresponding risk. According to the performance of the organization, the decision regarding the tenure of the board of directors strongly depends on the sources of risk.

The main idea is that if the performance risk is mainly caused by the hidden abilities of the board of directors, subsequently, the company's stock returns will reflect the abilities of the board of directors, and if the risk of the company's stock returns is caused by factors other than the abilities of the board of directors in terms of increasing efficiency and market share, factors such as interest rate changes, national currency parity rates, and inflation rates. monetary and financial policies and political conditions and macroeconomic variables in general have an effect. As a result, two sources of risk are obtained: the risk caused by uncertainty about the level of the board of directors, which is called extraordinary risk [4], and the other is the risk caused by sources outside the control of the board of directors, which is systematic risk [5].