AABFJ Volume 16, Issue 6, 2022.

Dasgupta & Dhochak: Progenitors of Firm’s Search Behaviour

Progenitors of Firm’s Search Behaviour: A

Country Comparison of Australia vs. India

Ranjan Dasgupta1 and Monika Dhochak2

Abstract

The determinants and consequences of firm-risk are widely studied in regard to the
US and other developed markets. However, little attention is paid to these issues in
emerging markets or in cross-country contexts. The empirical literature is also
mostly silent about the progenitors of firms’ search behaviour in an organisational
risk context. To fill these research gaps, we investigate the progenitors of a firm’s
search behaviour (i.e. risk-taking) in a bi-country context of Australia vs. India with
395 firms across 2003-2017. We use four distinctive risk measures - return on asset
SD, capital expenditure ratio, accounting beta and R&D intensity, as dependent
variables representing the overall search behaviour of firms and thirteen variables
under four independent constructs. We use factor analysis to eliminate redundant
variables and then multiple regressions to fulfil our research objectives. Results
show that fundamental valuation, psychological, corporate governance and
performance drivers all influence firms’ overall search behaviour. Specifically, firm
size, market size, growth opportunities, board busyness, expectation, and operating
and cash performance are the most critical sub-progenitors driving firm’s risk-taking.
Our results are consistent across time, country-heterogeneity and industry contexts.
Our study results would be of immense help to firm-managers, investors, policy-
makers, and other stakeholders to assess a firm in the risk-return context from both
emerging and developed country perspectives. Thereby, these would help these
stakeholders in strategic policy decisions and portfolio rebalancing decisions
objectively and in a timely manner.
Keywords: Firm-risk, Managerial risk-taking, Search behavior, Corporate governance,
Progenitors of risk

JEL: G21, G34

1
Indian Institute of Management Raipur, India. Dasguptaranjan75@gmail.com
2
Indian Institute of Management Nagpur, India.

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Introduction

While the determinants and consequences of firm-risk (or managerial risk-taking [as used
interchangeably here]) are recently examined in the US and other developed markets
worldwide (see e.g., John et al., 2008; Bargeron et al., 2010; Faccio et al., 2011; Li et al., 2013;
etc.), little attention is paid to these issues in emerging markets or in cross-country contexts.
Also, scholarly research in strategy, finance and other organisation disciplines have generally
focused on identifying factors that explain firm-performance without serious note of drivers
(i.e. progenitors) of firm-risk except in relation to systematic risk. In this paper, we try to fill
these research gaps by finding out the progenitors of firm-risk (i.e. firm’s overall search
behaviour) in a bi-country context of Australia vs. India by using unsystematic accounting
based measures.

We begin by providing working definitions of risk, firm-risk and managerial risk-taking. It is

critical to draw a distinction first between how managers perceive risk (i.e. risk-taking) and
how external stakeholders measure risk (i.e. firm-risk), as the two have most often been
confused. Strategy and finance literature defines risk in two ways. For some authors (e.g.
Feigenbaum and Thomas, 1988), it represents the degree of uncertainty and is thus measured
as variability in income. This definition corresponds to the notions of firm-risk generally held
by the investors/shareholders who wish to price the future income streams and thus determine
the value of that future income. A critical influence on the pricing of a firm’s future income
(i.e., through profitability measures and/or stock returns) is the uncertainty of that income.
Firms, which report returns varying disproportionately (volatile or downside firms) relative to
its own past returns or the overall market’s returns, are subject to higher risk. Therefore, here
we have taken both income stream uncertainty and market-adjusted accounting beta (under
robustness tests) to proxy firm-risk.

On the other hand, the term ‘managerial risk-taking’ refers to choosing the option with the
higher outcome variability, i.e., within the wider range of possible outcomes (i.e. innovative
searches). However, Shapira (1995) and Miller and Leiblein (1996) argue that managers view
risk more in terms of downside losses (i.e. problemistic searches). They are more likely to focus
on the potential losses of an investment, i.e., actions that increase firm’s exposure to loss are
risky considerations. Therefore, according to us, ‘managerial risk-taking’ seeks to reduce firm-
risk by limiting downside exposure even if this sacrifices upside potential in the process. That
is why many prior studies use firm-risk to proxy managerial risk-taking because managerial
risk-taking assumes to modify firm-performance (Palmer and Wiseman, 1999). In other words,
managers undertaking risky projects also create scope of wider fluctuations in operating
income, which makes the firm risky in the eyes of external stakeholders including shareholders.

Generally managers make strategic choices in pursuing problemistic (say capital investment in
new projects or technology) and/or innovative (say research & development expenditures)
searches on demand and/or at regular intervals out of probable differential risk-return
characteristics’ investment proposals on behalf of the firm. Then, one combines the risk-return
characteristics of the selected investments to create a portfolio of risk and return that reflects
overall firm-risk in the form of variability of income stream and market return which investors
look at. Therefore, in this study we have used CAPEX ratio and R&D intensity (under
robustness tests) to proxy managerial risk-taking also in the organisational context. So, overall
we subscribe that both firm-risk and managerial risk-taking are inclined to firm’s overall search
behaviour.

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However, existing empirical literature is mostly silent about the drivers (i.e. progenitors) of
firm-risk (or managerial risk-taking) concerning problemistic or innovative searches by
organisations and their managers. Only a few studies like Xiadong et al. (2014) try to
investigate its determinants from the theoretical application viewpoint. We fill these gaps in
the literature by studying the influence of firm’s performance drivers, psychological inputs,
corporate governance framework and mechanisms, and fundamental valuation drivers as
progenitors of firm’s overall search behaviour (i.e. firm-risk or managerial risk-taking) in a
single study. We also use the most advanced Confirmatory Factor Analysis (CFA) approach
and multiple regression approach in a bi-country context consisting of one emerging (India)
and one developed (Australia) country. Our results will also put some light on whether the
same progenitors are driving both firm-risk or managerial risk-taking behaviour or not.

We contribute to the existing literature in two ways. Firstly, we frame firm-risk (or managerial
risk-taking) in two different contexts under a single study to examine and find out the most
influential drivers of them in a bi-country (India and Australia) context which has never done
before. Under each of these measures, we have also taken two dependent variables each of
distinct nature to make our study more robust. We accept all four of our hypotheses that imply
that fundamental valuation, psychological, corporate governance and performance drivers all
are driving firm-risk or managerial risk-taking, i.e., overall search behaviour unanimously.
More specifically, we observe that firm-size, market size and growth opportunities of the firm
within fundamental valuation drivers, board busyness under CG drivers, expectation among
the psychological determinants, and firm’s operating and cash performance are the most critical
sub-progenitors as taken in our study. However, board independence and P/BV has no role to
play in influencing risk or risk behaviour. In addition, it is evident from our results that country-
specific regulatory and/or cultural characteristics have no role to play in influencing firm’s
overall search behaviour in Australia and India.Secondly, we use a mixed methodology by
combining PCA, CFA (to eliminate redundant variables) and multiple regression model with
the main dependent variables (ROASD and CAPEX ratio) and with two additional dependent
variables (i.e. accounting beta and R&D intensity) under robustness tests for the first time in
literature. This finds out progenitors for sample firms which influence both firm-risk or
managerial risk-taking i.e. overall search behaviour simultaneously. Limited earlier studies are
weak in their methodology.

The remaining portion of this paper is organized as follows – section 2 talks about the relevant
literature and develop hypotheses, section 3 presents data and methodology, section 4 presents
the results and section 5 concludes the discussion, followed by references.

Materials and methods

Literature review and hypotheses development

Performance drivers and firm-risk or managerial risk-taking

The direct impact of firm-performance on firm-risk or managerial risk-taking is central to work

of Fisher and Hall (1969) and Hurdle (1974) [positive], and Bowman (1980; 1984) and
Fiegenbaum and Thomas (1985) [negative], and is significant in Singh’s (1986) research.
However, most of these studies see the impact of performance on firm-risk or managerial risk-
taking from a troubled firm context (i.e. problemistic searches) and not on an overall top-down
basis. In addition, empirical works mostly study the income stream uncertainty by either taking
the return on assets (ROA) or return on equity (ROE) measures. To fill these gaps in the existing

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literature, here we have taken the actual firm performance, actual market return performance
of the firms, and also the cash performance to examine the impact of performance as a whole
on firm-risk or managerial risk-taking (i.e. overall search behaviour) (see table 1).

More specifically, in the model developed here, we hypothesize that poor performance drives
risk in both variability of income and problemistic search behaviour by managers. The
underline of our hypothesis is the concept of satisficing levels of firm performance (March and
Simon, 1958; and Simon, 1976) and problem-motivated search. In addition, performance above
satisficing levels creates slack resources, which motivate managers to innovative searches
when opportunities arise (see e.g. Weinzimmer, 2000).

Therefore, our first hypothesis is:

H1: Performance drivers (operating, stock market and cash) influence firm-risk or
managerial risk-taking (i.e. overall search behaviour).

Psychological drivers and firm-risk or managerial risk-taking

Firm’s managers take decisions based on two different measures - the performance level they
aspire to (aspirations) and the performance level they expect (expectations).

This aspirations-expectancy gap for below performing firms would induce them to undertake
risky decisions (problematic searches) in capital expenditure front or (innovative searches) in
R&D front, which in turn reduces organisational predictability and creates income stream
uncertainty and investors’ suspicions. Although all earlier studies use only actual performance
to predict risk, we follow the behavioural theory (Cyert and March, 1963) of the firm and use
expected performance along with actual performance here. It allows us to differentiate between
the direct effects of performance on firm-risk and/or managerial risk-taking and the
psychological impact of the aspirations-expectations process on these.

As both aspirations and expectations are manager and firm-centric reference or target points
we also incorporate an industry performance psychological driver (see table 1) in line with
most earlier empirical studies (Lehner, 2000; and Miller and Bromiley, 1990) which adopt the
industry mean or median as the reference point. We modify our measure to incorporate the
country impact (economic, cultural, regulatory, etc. [see Bargeron et al., 2010; Giordani and
Zamparelli, 2011; Hofstede, 2001; etc.) by calculating firm’s reference points in this regard in
relation to industry averages specifically for India and Australia (i.e. industry-country
performance measure [see table 1]). This will cater not only the firm’s, but industry-
heterogeneity also (see Lehner, 2000; and Miller and Bromiley, 1991) within the country. This
is also used here as a complementary measure to firm’s actual performance impact on firm-risk
or managerial risk-taking (i.e. overall search behaviour). Therefore, our second hypothesis is:

H2: Psychological drivers (aspirations-expectancy gap in terms of firm’s actual

performance, market performance and industry-country performance) influence firm-risk
or managerial risk-taking (i.e. overall search behaviour).

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Corporate governance drivers and firm-risk or managerial risk-taking

Agency theory asserts that managers are reluctant to undertake risky (especially innovative
ones) projects out of concern for their personal welfare (Fama, 1980;Holmstrom, 1999).
Agency and corporate governance researchers (see e.g., Andres and Vallelado, 2008; Belghitar
and Clark, 2015; Pathan, 2009;etc.) address this declining risk-preferences of firm-managers
by prescribing various control mechanisms. These can affect managerial risk-taking behaviour
positively, such as, board size, board independence, women directors’ presence, busy directors,
firm’s equity ownership and ownership structure, etc.

In line with the assumptions of the agency theory, the number of directors serving a corporate
board (i.e. board size) is relevant to the outcome of the board decisions. Although there is no
optimal board-size for heterogeneous firms in a country context, board size affects firm’s
policy choices, and thereby firm-risk or managerial risk-taking (see Coles et al., 2008; and
Guest, 2009).

In addition to board-size, board-diversity (i.e. percentage of independent and women directors)

is also associated with better firm performance, quality of earnings and/or lower risk-taking
propensity by managers. One of the most influential arguments emphasises the role of the
incentives that independent directors have to protect their reputation (see Fama, 1980) in the
market for independent directorships. Under this so-called reputation hypothesis, non-
executive directors would support investments in less risky projects, which will help firms in
avoiding losses and would thus protect the image of their firms (Pathan, 2009). In addition,
based on the monitoring hypothesis, we assume that the presence of non-executive directors on
corporate boards tends to reduce firms’ risk-taking by putting a hold on value-destroying
investments. This would encourage them to restrict firms and its managers to take innovative
searches and thereby lower firm-risk or managerial risk-taking (Aebi et al., 2012; Ellul and
Yerramilli,2013; Pathan, 2009).

Farrell and Hersch (2005) find an inverse link between firm-risk and female directors,
However, Adams and Funk (2012) show that female directors are more prone to take risks than
men are. Levi et al. (2014) also show that boards with female directors pursue less aggressive
acquisition strategies. All these imply that boards with higher women directors’ presence are
mostly risk-averse in terms of innovative searches due to excessive monitoring or conflicts and
thereby income stream uncertainty is lower in those firms.

One aspect of resource dependency theory linked with corporate governance and performance
(and thereby firm-risk) is the intensity of board activity, as measured by the frequency of board
meetings. In line with the ‘monitoring hypothesis’ (see Berger et al., 2014) we argue that a
board (mostly the independent directors) with more meetings might monitor its executives
more strictly. Stricter monitoring would limit executive discretion and decrease opportunities
for excess risk-taking, which might ultimately lead to a negative relationship between number
of board meetings and risk-taking. However, it is clear from above discussion that all of the
corporate governance drivers would have some influence on firm-risk or managerial risk-taking
(i.e. overall search behaviour). Therefore, our third hypothesis is:

Corporate governance drivers (board size, board independence, women directors’ presence
and number of meetings) influence firm-risk or managerial risk-taking (i.e. overall search
behaviour).

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Fundamental valuation drivers and firm-risk or managerial risk-taking

Firms typically have heterogeneous investment opportunity sets. Hence, there is no reason to
believe that the corporate governance’s and other antecedents’ (taken here) influence on firm-
risk and/or managerial risk-taking would be the same for a firm with plenty of attractive
investments and another one with few investment opportunities available. In fact, we argue that
the negative effect of a large board should be weaker for high-growth firms but more severe
for low-growth firms (see Nakano and Nguyen, 2012). As a result, a high-growth firm would
exhibit a higher market value (so price-to-book value would also be higher) together with a
high-risk profile. In addition, a high-growth firm typically enjoys higher market share, size and
mostly satisfies investors by higher dividend payouts.

Field studies using survey data (see Brav et al., 2004) provide compelling evidence that firm-
risk can shape dividend policy. Venkatesh(1989) also argue that higher level of firm-risk causes
a reduction in firm’s willingness to discharge cash through dividend payments. Therefore, in
choosing dividend levels, managers strategize based on sustained future earnings with a high
degree of certainty. This suggests that dividend payments should be inversely related to firm-
risk or managerial risk-taking. Myers and Majluf(1984) also contend that managers might also
have to choose between dividend payments and capital expenditures (investments) which is
also used here as a proxy of managerial risk-taking. Therefore, our fourth hypothesis is:

Fundamental valuation drivers (high-growth, increasing size & market-size, low dividend-
pay-outs and increasing P/BV) influence firm-risk or managerial risk-taking (i.e. overall
search behaviour).

Control variables and firm-risk or managerial risk-taking

In many of the above-mentioned papers (see Fisher and Hall, 1969; Lant and Montgomery,
1987; Lehner, 2000; Coles et al., 2008; Guest, 2009; John et al., 2008; Aebi et al., 2012; Nakano
and Nguyen, 2012; Ellul and Yerramilli, 2013; etc.) results show that firm’s characteristics act
as catalysts to the main conclusions drawn. Hermalin and Weisbach(2003) also argue that risky
external environment can shape firm’s risk-taking based on its heterogeneous characteristics.
Therefore, here we have incorporated industry-country performance variable and fundamental
valuation drivers, which would surely proxy the impact of external environment on studied
firms.

In this study we also incorporate age, leverage and liquidity to proxy individual firm’s
heterogeneous characteristics’ impact on firm-risk and managerial risk-taking as control
variables. Age is the basic firm-characteristics which impacts firm-risk or managerial risk-
taking through the indirect route of ‘market power’. If ‘market power’ is assumed to have an
impact on firm-risk or managerial risk-taking,3 and as it is only logical to assume older firms
which has survived for some length of time and cash-rich firms which has liquidity to rule with,
do have higher ‘market power’, then older and liquid firms would exhibit evidence of lower
risk (see Venkatesh, 1989). Firms also can use borrowing as a substitute for holding cash (i.e.
liquidity) because leverage can act as a proxy for the ability of firms to issue debt (John, 1993).
This implies higher risk-taking by firms and managers. Firms with more resources (i.e. slack)

3
It is assumed here as we have taken market size as an important driver of firm-risk or managerial risk-taking
under fundamental valuation drivers.

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tend to have more leeway to indulge in exploratory activities (Cyert and March, 1963),
allowing their CEOs more discretion (Hambrick and Finkelstein, 1987).

Therefore, we have incorporated firm’s age, leverage and liquidity as control variables to
moderate the effect of our antecedents on firm-risk or managerial risk-taking (i.e. overall search
behaviour).

Data

We start with all firms’ data of S&P/ASX 300 and CNX NIFTY 500 collected from Centre for
Monitoring Indian Economy’s (CMIE) prowess database and Bloomberg database. However,
during the sorting process, we exclude financial services companies (including banks and
NBFCs) and utility companies. Thus, we use data of 395 firms across study years starting from
2003 to 2017 of Australia and India. This results in 5,925 firm-years for all these 17 variables.
We undertake only India and Australia here because of their rising trade associations and most
importantly, we think that distinctive cultural characteristics of these two countries can provide
interesting and conflicting results in our case.

Variables descriptions

Table 1: Description of variables

This table explains the dependent and independent variables (under different constructs) undertaken in this
study. The firm-risk is proxied by income stream risk and managerial risk-taking is represented by CAPEX
ratio. These two are dependent variables in this study. The 15 independent variables (drivers/antecedents) as
constructed here are classified into 4 broad heads (constructs) in accordance with their nature. The heads are
shown in parentheses after each variable.
Variables Description
Income stream risk Ex-post standard deviation () of individual firm’s actual return on assets (ROA) for preceding 5
years in year t
CAPEX risk [(Capital expenditure/Sales)*100] in year t
Operating Actual ROA [(PAT/Average total assets)*100] in year t
performance
(PD)
Market Annualised monthly market return {[((1 + R)^12) - 1] x 100} of a firm in year t
performance
(PD)
Cash performance [(OCF/Average total assets)*100] in year t [average total assets = (total assets in year t-1 + total
(PD) assets in year t)/2]
Aspiration ASPt = ([ROAt-1 – ASPt-1 (i.e. ROAt-2)] + ROAt-1)
(PSYD)
Expectation EXPt = ([PEt-1 – EXPt-1 (i.e. PEt-2)] + PEt-1)
(PSYD)
Industry-country [Firm’s actual ROA in year t (ROAt) - Mean ROA for all firms in a similar industry in the country
performance in year t-1 (IndROAt-1)]
(PSYD)
Board size Number of directors in the board in year t
(CGV)
Board independence % of independent directors to total number of directors in the board in year t
(CGD)
Women presence in % of women directors in the firm-board in year t
board
(CGD)
Board busyness Number of board meetings in year t
(CGD)
Market size Net sales amount in year t
(FVD)
Growth % change in investment in total assets in year t from year t-1 (i.e.TAt = [{(TAt -TAt-1)/TAt-
opportunities 1}*100])
(FVD)
Dividend payout [(Equity dividend/PAT)*100] in year t

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(FVD)
P/BV Market capitalisation in year t/Book value of assets in year t (scaled in average)
(FVD)
Size Average total assets in year t [average total assets = (total assets in year t-1 + total assets in year
(FVD) t)/2]
Note 1: All market return calculations are undertaken on adjusted closing price basis.
Note 2: All absolute amount figures have been log normalised.
Note 3: PD – Performance drivers; PSYD – Psychological drivers; CGD – Corporate governance drivers; and FVD –
Fundamental valuation drivers.
Note 3: PAT – Profit after tax; OCF – Operating cash flow; ASPt - Aspiration in year t; EXPt - Expectation in year t; PE -
Price-earnings ratio; TA – Total assets; P/BV – Price-to-book value.

Table 1 explains the variables (under different constructs) undertaken in this study.

The unpredictability in a firm’s income stream is the result of its inherent risk and the
managerial risk-taking behaviour (Bromiley, 1991; and Wright et al., 1995). Therefore, we
measure firm’s risk from the income stream variability and the managerial problemistic and
innovative searches (risk-taking) by CAPEX risk proxies.

In the first case, firm-risk (henceforth ) is measured as ex-post standard deviation of individual
firm’s actual return on assets (i.e. ROA) for preceding 5 years on a rolling basis, i.e.,

t-1 (ROAj – ROA)2

(ROA)t =  (1)
j=t-5
n-1

Where, t = 2003, 2005,……., 2016

We also measure managerial risk-taking by incorporating CAPEX ratio (see table 1). CAPEX
ratio increases managerial risk-taking in two ways (see Brealey and Myers, 1984; and Shapiro
and Titman,1986). In the first case, if firm opts to be capital-intensive and demand fluctuates,
there would be wider variations in income streams. Secondly, managers using large amount of
capital for innovative searches (measured by R&D intensity) runs a high risk of capital
obsolescence. In this study, we calculate CAPEX ratio in line with Coles et al. (2006).

We discuss the independent constructs (see table 1) in detail while formulating hypotheses in
the previous section.

Methods – Exploratory and Confirmatory factor analysis

We employ factor analysis (exploratory and confirmatory) (most appropriate for testing a
newfound theory and model [as it is here] (see Gefen et al., 2011; and Bingol et al., 2018) and
multiple regression to test the unidimensionality of the constructs (variables) and to analyze
the drivers (i.e. progenitors) of firm-risk or managerial risk-taking (i.e. overall search
behaviour).

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It is also extremely essential to purify the measuring instruments of variables that do not
correlate to the constructs (Churchill et al., 1979) before we undertake any type of factor
analysis (i.e. exploratory or confirmatory). Therefore, we check the convergent validity of each
construct by examining the average variance extracted (AVE) values. Constructs, which have
AVE values greater than 0.5 and composite reliability greater than 0.70, are said to have a good
convergent validity or unidimensionality (see Chin, 1998; and Chin et al., 2003). We ascertain
the discriminant validity of constructs by comparing the AVE scores of the two constructs,
with the square of the correlation between the two constructs. If both the AVE values are larger
than the square of the correlation, we consider the constructs to show discriminant validity
(Fornell and Larcker, 1981).

Methods - Multiple regression model

Next, we use multiple regression analysis (see Gujarati, 2005) to test the hypotheses about the
existence of causal effects, to estimate the strength of those effects, and to compare the strength
of effects across groups (Stolzenberg, 2004). We estimate multiple regression equations using
the set of four independent variables, i.e., fundamental, corporate governance (CG),
psychological and performance drivers to examine their influence on firm-risk (i.e. ROASD) or
managerial risk-taking (i.e. CAPEX ratio). In these two regression models, we also incorporate
leverage, liquidity and firm-age as control variables. We check for the assumptions of
normality, multi-collinearity and auto-correlation before running the regression models. The
goodness-of-fit test of Kolmogorov-Smirnov (K-S) shows that the data set does not violet the
normality assumption. The Durbin-Watson values prove that there is no presence of auto-
correlation. In addition, the correlation matrix and the value of VIF (Variance Inflation Factor)
VIF (βi< 10) show that multi-collinearity is not an issue for the variables used in this study (in
line with Khan et al., 2016).

We thereby use the following two regression models in this study.

Model I:ROASD = β0 + β1Fundamental + β2CG + β3Psychological + β4Performance +

β5Leverage + β6Liquidity + β7Firm-age + ε (2)

Model II:CAPEX ratio = β0 + β1Fundamental + β2CG + β3Psychological + β4Performance +

β5Leverage + β6Liquidity + β7Firm-age + ε (3)

Results

Descriptive statistics results

Table 2 provides descriptive statistics results of the variables undertaken in this study. Results
show that cash performance and market performance are highly volatile in comparison to
operating performance of the studied firms. The wide variability of growth opportunities arises
out of internal cash flow (fluctuating C&CE) and is evidenced by size, market size and dividend
pay-out proxies. This makes the innovative searches uncertain for the firms, but points out that
there is enough scope for problemistic searches. However, the psychological and corporate
governance variables represent a stable situation in organisation contexts. Overall, this
substantiates the investigation of firm-risk or managerial risk-taking (i.e. overall search
behaviour) from different constructs’ influential role as done here.

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Table 2: Descriptive statistics results

This table provides mean, standard deviation, maximum and minimum values of 395Australian and Indian
firms studied here (see table 1 for description of these variables).
Variables (measures) Minimum Maximum Mean Std. Deviation
ROA SD (in %) .00 145.91 5.12 9.39
CAPEX ratio (in %) .07 171.75 141.69 113.98
Market size (in Sales US$) .00 3544433.11 84062.36 319.75
Size (in TA US$) 6.41 19693438.67 207132.20 1141.28
Growth opportunities (in %) -10.00 584.71 88.67 456.17
Dividend payout (in %) .00 625.04 241.68 314.71
P/BV (in times) .51 163.21 4.23 9.17
Aspiration (in %) -31.99 88.85 5.18 9.89
Expectation (in %) -2.98 160.53 3.68 8.96
Industry-country performance (in %) -31.98 60.35 5.36 9.37
Board independence (in %) 17.78 91.87 62.92 15.49
Women directors presence (in %) .00 63.00 12.46 9.75
Board size (number of directors) 3.22 16.78 7.71 2.62
Busyness (Number of board meetings) 3.75 27.50 10.53 3.65
Operating performance (ROA in %) -34.47 57.86 5.83 9.23
Market performance (Return in %) -9.99 1154.77 25.18 86.82
Cash performance (Cashflow in %) -86.97 1362.06 15.34 78.24
Leverage (TD/TA %) .00 89.20 22.39 16.91
Cash and cash equivalents (in US$) 2.06 1099123.30 11890.97 654.39
Age (in years) 15.00 212.00 36.73 30.47

Correlations results

Table 3 indicates the co-relationships among the studied variables.It is evident thatgrowth
opportunities, aspiration and busy boards significantly positively influence firm-risk. On the
other hand, managerial risk-taking has significant positive association with market returns and
growth opportunities of the sample firms.Market size, women directors, board size and
operating performance influence both firm-risk or managerial risk-taking significantly
negatively. In addition, size, industry-country performance, leverage and liquidity have a
significant negative influence on firm-risk. Results also prove interrelationships in between
variables, which formulate different constructs here. All these results further substantiate our
investigation objectives under this study.

Analysis of the results

Our hypothesized model estimates the influence of fundamental, psychological, corporate

governance and performance antecedents (i.e. variables) on firm-risk (i.e. ROASD) or
managerial risk-taking (i.e. CAPEX ratio). For testing the hypothesized model, we attempt to
gather information about latent factors through observable variables, and thereafter employed
factor analysis (exploratory and confirmatory) by examining the covariation among observed
variables. Then, we run multiple regression analysis to analyse the influence of these observed
variables on firm-risk or managerial risk-taking (i.e. overall search behaviour).

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Table 3: Correlations results

This table presents the correlations results among the studied variables. Here, ROASD stands for income stream risk, CAPEX implies CAPEX ratio/risk, MS indicates market
size, SIZE implies size of the firm, GRO stands for growth opportunities, DPR represents dividend pay-outs, P/BV implies price-to-book value, ASP stands for aspiration,
EXP implies expectation, ICPER indicates industry-country performance, BI stands for board independence, WD implies % women directors in the board, BS represents
board size, BM indicates number of board meetings, ROA means return on assets, MR implies market return, CPER denotes cash performance, LEV represents leverage of
the firm, C&CE (cash & cash equivalents) stands for liquidity of the firm and AGE indicates age of the firm.
Variables ROASD CAPEX MS SIZE GRO DPR P/BV ASP EXP ICPER BI WD BS BM ROA MR CPER LEV C&CE AGE
ROASD 1
CAPEX .091 1
MS -.241** -.138** 1
SIZE -.212** -.098 .932** 1
GRO .352** .139** -.106* -.086 1
DPR .007 -.008 -.033 -.027 -.013 1
P/BV .051 -.023 .042 -.021 .001 -.014 1
ASP .179** -.086 .217** .118* .045 -.082 .166** 1
EXP .071 -.014 .086 .046 .016 -.013 .977** .177** 1
ICPER -.170** -.076 -.254** -.364** -.089 -.069 .134** .665** .086 1
**
BI -.034 -.008 -.198 -.142** -.012 .046 .002 -.104* .001 .128* 1
** * **
WD -.189 -.122 -.046 -.053 -.163 -.015 -.025 .002 -.060 .231** .431** 1
BS -.195** -.106* .819** .830** -.077 -.040 .046 .149** .092 -.233** -.187** .022 1
BM .123* .029 -.423** -.383** .085 .051 -.164** -.224** -.186** .078 .292** .187** -.391** 1
** * ** * **
ROA -.266 -.114 .212 .081 -.119 -.092 .186 .810** .156** .841** -.099 .088 .146** -.258** 1
* **
MR .090 .120 .040 .002 .248 -.022 .096 .092 .110* .026 -.028 -.151** -.052 -.133** .109* 1
CPER -.031 -.017 .169** .149** -.008 -.003 .012 .120* .010 .027 -.064 -.010 .110* -.060 .113* .001 1
LEV -.207** -.096 .124* .200** -.084 .082 -.126* -.173** -.116* -.192** .067 .062 .116* .037 -.175** -.089 -.081 1
C&CE -.170** -.070 .904** .936** -.076 -.049 .031 .140** .079 -.328** -.195** -.069 .798** -.408** .126* .042 .201** .074 1
** **
AGE -.050 -.080 .367 .309** -.081 -.031 .173 .077 .187** -.095 -.004 .026 .322** -.230** .082 .010 .081 .008 .313** 1
** Accepted at 1% level of significance; * Accepted at 5% level of significance.

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The Exploratory factor analysis results

Table 4: KMO and Bartlett’s tests results

This table provides the KMO and Bartlett’s testsvalues, whichproves the sample adequacy and factorability of
the data.
Kaiser-Meyer-Olkinmeasure of sampling adequacy 0.750

Bartlett's Test of Sphericity Approx. Chi-Square 4845.966

df 105
Sig. .000

The first step to analyse the hypothesized model is to identify and validate the latent variables.
Before extracting the factors, we use Kaiser–Meyer–Olkin (KMO) (Kaiser, 1974) measure and
Bartlett’s (1950) test of sphericity, to ensure the inherent sufficient correlation in the sample-
data. Kaiser (1974) observes that KMO values lying between 0.5 and 0.7 are mediocre, values
between 0.7 and 0.8 are good, and values between 0.8 and 0.9 are great for factor analysis.
KMO value for our sample data is 0.750 as reported in table 4, greater than 0.50 and thereby
acceptable.

Table 5: Rotated component matrixaresults

This table provides the construct used to describe the variables and values 1,2,3,4 explain the underlining
structure in the variables and thereby extract the factors from the structure.
Construct 1 2 3 4
Size .960
Market size .936
Growth opportunity .924
Dividend pay-out .898
Board meetings .895
Board size .892
Women directors .862
Independent directors .782
Expectation .846
Industry-Country performance .834
Aspirations .833
P/BV .807
Firm return .947
Cash performance .946
Market return .933

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 5 iterations.

The objective of the exploratory model is to explore and find out the structural relationship
between variables and reduce the number of variables into unobserved unrelated variables from
correlated variables. We perform the principal component analysis (PCA) to extract the factors
and simplify the factor structure of a set of items (Costello and Osborne, 2005). We use the
Eigen-value criteria (eigenvalue > 1) to extract the factors. As a result, four factors are extracted
explaining 79.57% variance in our data set. Rotated component matrix is drawn using
Orthogonal Varimax factor rotation method as shown in Table 5; factor-loading ≥ 0.50 is
acceptable as a significant cut-off value.

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The confirmatory factor analysis results

The results of the exploratory factor analysis, in a given domain, fundamentally provides a
small number of latent constructs (also known as factors), which influence the potentially vast
array of observed variables (Nusair and Hua, 2010). We present the hypothesized factor model
in figure 1. In this model, we measure four latent variables (i.e. fundamental, psychological,
corporate governance and performance drivers) with thirteen observed variables. The purpose
of confirmatory factor analysis (CFA) is to test statistically the ability of the hypothesized
factors, which are correlated and observed variables, and measuring each factor (Schumacker
and Lomax, 2004). Based on the low loading cut-off (i.e. less than 0.40) in variance-covariance
matrix, we drop two variables i.e. board independence (under corporate governance drivers)
and P/BV (under fundamental valuation drivers) for further analysis. Following redefined and
retested model, we specify the parameter estimates and evaluate the overall model fit by
examining the extent to which our data set supports the hypothesized model. Several measures
of goodness-of-fit indices are estimated such as chi-square/df ratio, Normed fit index (NFI),

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relative fit index (RFI), comparative fit index (CFI), incremental fit index (IFI), root mean-
square error of approximation (RMSEA) as propagated by Joreskog and Sorbom, 1993; Hair
et al., 1998; and Schumacker and Lomax,2004). Thereafter, we evaluate the measurement
constructs for reliability and validity (both convergent and discriminant).

Table 6: Model fit indices of the CFA model

This table reports the goodness-of-fit indices for measurement structural model. Chi-square statistic (χ2/CMIN)
and root mean square error of approximation (RMSEA) shows the absolute fit indices; adjusted goodness-of-
fit index (AGFI), comparative fit index (CFI) is used to measure the incremental fit indices; normed chi-square
(χ2/df) measures the parsimonious fit.

Model CMIN DF χ2/df RMSEA AGFI CFI

CFA 108.53 59 1.840 0.046 0.94 0.98

Figure 2. Results of confirmatory factor analysis

The maximum likelihood method of estimation is then employed, as the data set does not violet
the multivariate normality assumption (Schumacker and Lomax, 2004). The application of
multiple fit measures ensures the acceptability and fitness of the overall model. As shown in
table 6, the overall fit indices are acceptable for the proposed model with χ2/df = 1.840, AGFI
= 0.940, NFI = 0.974, RFI = 0.965, IFI = 0.988, CFI = 0.98, and RMSEA = 0.046. All the
above indices are acceptable and fit the measurement model (Hair et al., 1998). This is evident
through our figure 2 depicts.

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Reliability and validity measures results

After attaining acceptable fit indices, the next step is to evaluate the reliability, convergent and
discriminant validity of the measurement model. Before performing the validity analysis, we
check each specified construct for the statistical reliability. The reliability of the construct
refers to the “extent to which it yields consistent results when the characteristic being measured
has not changed” (Leedy and Ormrod, 2005). Zikmund et al. (2010) state that reliability is an
indicator of that measure’s internal consistency. We consider Cronbach alpha coefficient as
the most appropriate method for testing the internal consistency of a scale (Hair et al., 1998;
Pallant, 2007). The value of Cronbach’s alpha ranges from 0 to 1 and 0.6 is considered as the
minimum value for checking the internal reliability (Hair et al., 1998).

Table 7: Reliability and validity results of the measurement model

This table presents the reliability and validity results of the measurement model. Here, constructs describes the
latent variables and variable defines a set of observed variables in the structured model. Standard loadings
measures the relationship between latent and observed variables. Item reliability and construct reliability are
used to test the reliability of the observed constructs used in the model, and Average variance extracted (AVE)
is used to measure the discriminant and convergent validity of the constructs.
Fundamental Size 0.96 0.92 0.97 0.83
valuation Market size 0.92 0.86
drivers Growth opportunity 0.90 0.81
Dividend payout 0.85 0.72
Psychological Expectation 0.99 0.98 0.89 0.66
drivers Aspiration 0.87 0.75
Industry-Country performance 0.51 0.27
Corporate Board meetings 0.91 0.83 0.93 0.85
Governance Board size 0.82 0.67
drivers Women directors 0.82 0.67
Performance Firm return 0.93 0.86 0.96 0.83
drivers Market return 0.88 0.78
Cash performance 0.93 0.85
*All factor loadings are significant at p = 0.05.
a
Construct reliability = (∑Standardized loadings)2/[(∑ Standardized loadings)2 + ∑ej].
b
Average variance extracted (AVE) = ∑(Standardized loadings2)/[ ∑(standardized loadings2)/ ∑ej], where ej is
the measurement error.

Table 7 shows the results of item reliability and construct reliability, representing the different
measures in the model ranging from 0.67 to 0.97 expect one item. The composite reliability of
all the constructs are above 0.70 (ranging from 0.89 to 0.91), indicating a very good reliability
of the constructs.

We use the convergent and discriminant validity to test the capability of constructs to measure
what it is intended to measure (Ibrahim et al., 2007; Zikmund et al., 2013). Table 7 shows that
the AVE values ranged from 0.66 to 0.83, exceeding the threshold value of 0.50 (Hair et al.,
1998), which implies sound convergent validity (Fornell and Larker, 1981; and Gerbingand
Anderson, 1988). Therefore, we claim that our indicators are truly representative of latent
construct. Additionally, we evaluate the discriminant validity when the value of AVE of each
latent variable is greater than its squared correlation coefficient. Henceforth, the convergent
and discriminant validity of the measurement model confirm its reliability and validity.

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Multiple regression results

Table 8: Multi-collinearity and correlations results

This table reports the correlations among the constructs used in the regression model and Variance inflation
factor (VIF) which checks the existence of multi-collinearity in the independent variables. Here, CG implies
corporate governance.
Constructs Fundamental CG Psychological Performance Leverage Liquidity Firm VIF
age
Fundamental 1.000 3.686
CG 0.794** 1.000 3.184
Psychological 0.785** 0.741** 1.000 3.081
Performance 0.684** 0.680** 0.671** 1.000 2.189
Leverage 0.046 0.026 -.011 0.029 1.000 1.013
Liquidity 0.022 0.030 0.056 0.000 0.063 1.000 1.134
Firm age -.006 .005 .049 -.002 .021 0.334** 1.000 1.131
**Correlation is significant at the 0.01 level (2-tailed).

Before running our multiple regression model, we further check the multi-collinearity among
the constructs as developed through CFA through Variance inflation factor (VIF). Results show
(see table 8) that there is no multi-collinearity issues in our model.

Table 9 presents Model I and II multiple regression results. It presents the R 2 (Coefficient of
determination), Adj. R2, F-ratio, D-W test, standardized beta coefficients of the model and
summarizes the multiple regression results which statistically explains the relationship between
dependent variables (ROASD and CAPEX ratio), and firm-specific independent variables and
control ones. Our results indicate the model fit (Model I: R2 = 0.622; Model II, R2 = 0.683
[overall]). It implies that a very good percentage (62.2% and 68.3% respectively) of the
variation in ROASD and CAPEX ratio can be explained with the whole set of independent
variables (Adj R2 = 0.620 and 0.681, respectively). Individual country results also document
good model fit.Our findings suggest that control variables such as leverage, liquidity and firm-
age do not significantly affect firm-risk and/or managerial risk-taking (i.e. overall search
behaviour). Therefore, our multiple regression and confirmatory factor analysis results are
consistent and significant at the 0.05 level of significance.

We accept hypothesis 1 that fundamental valuation drivers positively and significantly

influence the firm-risk (coefficient value of 0.128 at 5% significance level [t value – 2.883]) or
managerial risk-taking (with 0.166 [t value 4.207]). Furthermore, earlier factor analysis results
corroborate that size (0.96) and market size (0.92) through indirect route of market power also
influence firm-risk or managerial risk-taking significantly. However, in individual country
context, fundamental valuation drivers influence managerial risk-taking in both Indian and
Australian firms, although they only influence income stream uncertainty of Australian
firms.The significant and positive coefficient values of 0.139 (t value – 3.386) and 0.070 (t
value – 1.877) respectively support hypothesis 2 that corporate governance (CG) drivers also
affect the firm-risk or managerial risk-taking. However, this is not true distinctly about
managerial risk-taking for Indian and Australian firms.In addition, our findings also reveal that
number of board meeting (0.91) i.e. busy boards is the most dominant progenitor to drive firm-
risk or managerial risk-taking. Our third hypothesis that managers take risky decisions based
on their psychological drivers gets support as our results show 0.166 (t value 4.184) and 0.224
(t value 6.028) coefficient values at 5% significance level. This is also evident when we
examine Indian and Australian firms separately.But, the role of such psychological drivers in
the variability in income for Indian firms is not evident.Our findings also suggest that while
considering psychological drivers, aspiration and expectations strongly influences managerial
decision-making and thereby income stream uncertainty. Our results also prove hypothesis 4

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i.e. performance drivers (firm, market and cash) significantly and positively influence firm-risk
(0.448 and t value – 13.279) or managerial risk-taking (0.461 and t value – 14.942). The
findings (concerning magnitude of coefficients) report that firm-performance progenitors
including firm-return, market-return and cash performance are the most influential drivers
those explains firm-risk or managerial risk-taking (i.e. overall search behaviour) decisions. We
further substantiate our results by examining Indian and Australian firms distinctly.

Robustness tests results

We undertake two robustness tests here. Firstly, we use accounting beta to proxy firm-risk and
R&D intensity to proxy managerial risk-taking along with our two main dependent variables.
Accounting beta is a non-market measure of systematic risk and the economy-wide factors
directly influences it, as opposed to unsystematic component that relates to other firm-specific
factors. We calculate this in line with Bowman (1979). Therefore, by taking market-adjusted
accounting beta along with firm-specific income stream risk, we make our study more robust.
R&D intensity (i.e. R&D expenditures/Sales) is a much volatile and unique proposition to
proxy managerial risk-taking, as not all firms are prone to it. We use R&D intensity only as a
secondary managerial risk-taking measure because R&D expenditures are high-risk
investments compared to capital expenditures on property, plant and equipment (see Bhagat
and Welch, 1995; and Kothari et al., 2001).

Secondly, we run the same regression models by taking nationalculture, investor protection
rights, and developed/emerging (as country regulatory and economic proxies) as instrumental
variablesboth for Australia and India. This is because the institutional and economic
environments prevailing in a country do affect firm’s risk-taking decisions. We rate the extent
of investor’s protection in India and Australia following arguments of company law about
minority shareholders rights across countries as argued by La Porta et al. (2008 & 1998). We
assess such rights based on six important parameters related to voting rights, also referred as
anti-directors rights, where existence of such parameters in the company laws of countries
would earn a score of one. Therefore, a total score of six would be for countries offering best
investors protection and vice-versa for score of one or zero. We define strong rights if the
overall score is above three.We follow Hofstede’s(2001) national culture scores for India and
Australia as given on six dimensions. Based on that, we assume that Indian managers would
be more risk seeking than their Australian counterparts would. The developed economic status
of Australia also may be the cause of more balanced and prudent approach by their firms and
managers, which bring transparency and stability concerning firm’s overall search behaviour.
According to us, all these can also provide some insights why in case of Indian firms the
antecedents of firm’s overall search behaviour is not so overwhelming unlike Australian firms.
However, our results do not documentthe country-specific impact on the firm-risk or
managerial risk-taking. Henceforth, we can conclude that country dynamics does not play a
significant role in firm’s risk-taking or search decisions.4

4
We do not report the robustness tests results for brevity purpose.

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Table 9: Multiple regression results

This table depicts the multiple regression results. Model I explains the relationship of the independent variables with firm-risk (i.e. ROASD as proxy for dependent variable),
while Model II defines the relationship of independent variables with managerial risk-taking (i.e. CAPEX ratio as dependent). We also incorporate leverage (TD/TA),
liquidity (C&CE) and firm age (current year – year of incorporation) as control variables here. βvalue shows the standardized beta coefficients and in parentheses we display
standard errors.
Model I Model II
Independent variables (ROASD) (CAPEX ratio)
β (Std. Error) β (Std. Error)
Overall India Australia Overall India Australia
Constant .394** .336 .387** .180** .276 .273**
(.088) (.352) (.147) (.083) (.270) (.144)
Fundamental .128** .104 .133** .166** .317** .140**
(.041) (.113) (.044) (.039) (.087) (.043)
CG .139** .147* .136** .070** .049 .066
(.040) (.107) (.043) (.037) (.082) (.042)
Psychological .166** .124 .175** .224** .095* .249**
(.043) (.104) (.048) (.040) (.080) (.047)
Performance .448** .470** .444** .461** .505** .456**
(0.032) (.089) (.035) (.031) (.068) (.034)
Leverage .009 .025 .006 -.025 -.025 -.025
(.681) (.070) (.028) (.231) (.053) (.028)
Liquidity .022 .017 .022 .007 .059 -.002
(.360) (.072) (.028) (.750) (.055) (.027)
Firmage -.018 .031 -.028 -.008 -.039 -.001
(.455) (.078) (.029) (.724) (.060) (.029)
R Square (R2) .622 .587 .633 .684 .773 .666
Adj. R2 .619 .563 .628 .681 .761 .662
F-test p < .001 p < .001 p < .001 p < .001 p < .001 p < .001
Durbin-Watson (D-W) 1.972 2.018 1.969 1.859 1.995 1.850
K-S test 0.000 0.000 0.000 0.000 0.000 0.000
** Significance values at 5% level (p<0.05)
* Significance values at 10% level (p<0.10)

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Discussion

Our hypothesized model estimates the influence of fundamental, psychological, corporate

governance and performance antecedents on firm-risk (i.e. ROASD) or managerial risk-taking
(i.e. CAPEX ratio). Therefore, first, we perform the PCA to extract the factors and then we
measure four above stated latent variables with thirteen observed variables (after excluding
board independence and P/BV). Multiple model-fit measures ensure the acceptability and
fitness of the overall model. The convergent and discriminant validity of the measurement
model also confirm its reliability and validity. Our results also indicate a very good model fit
for the multiple regressions. It shows that a very good percentage (62.2% and 68.3%
respectively) of the variation in ROASD and CAPEX ratio can be explained with the whole set
of independent variables (Adj R2 = 0.620 and 0.681, respectively).

We accept all four of our hypotheses overall and for Australian firmsthat imply that
fundamental valuation, psychological, corporate governance and performance drivers all are
driving firm-risk and/or managerial decision-making (i.e. overall search behaviour)
unanimously. However, for Indian firms only the performance drivers influence firm’s overall
search behaviour whereas fundamental and psychological drivers affect managerial risk-taking
only.More specifically, we observe that firm-size, market size and growth opportunities of the
firm within fundamental valuation drivers, board busyness under CG drivers, expectation
among the psychological determinants, and firm’s operating and cash performance are the most
critical sub-progenitors as taken in our study.

The significant influence of growth opportunities on risk and risk-taking are validating Andres
et al., 2005; Guest, 2009; and Nakano and Nguyen, 2012, whereas we support Myers and
Majluf (1984) and Venkatesh (1989) that firms choose between capital expenditure and
dividend payout. We find no relation in between risk and risk-taking with board independence
unlike Aebi et al. (2012); Ellul and Yerramilli (2013); and Pathan (2009), rather PCA deletes
it. Surprisingly, contradicting ‘monitoring hypothesis’ (Berger et al.,2014), we put our strong
implication that busy boards undertake searches to move up the pecking order i.e. superior
performance (Lipton and Lorsch, 1992), and thereby creating income stream uncertainty. Our
results also authenticate the positive influence of board size and women directors’ presence in
firm-boards in line with Adams and Funk (2012); Coles et al. (2008); Guest (2009); and Nakano
and Nguyen (2012); however disagree with Farrell and Hersch(2005) and Levi et al. (2014).
The psychological influence of firm-managers on firm-risk and/or risk-taking is significantly
evident as their expectation is driving their risk-preferences (problemistic or innovative) more
than the aspiration, which resembles the behavioural theory (Cyert and March, 1963)
implications. However, we do not find any notable impact of industry heterogeneity of the
specific country or as such any country-specific regulatory and/or culturalimpact. We also
observe overwhelming influence of firm’s own operating, market and cash performance on its
risk and managerial risk-taking (in line with Fisher and Hall, 1969; Hurdle, 1974; and
Weinzimmer, 2000). Therefore, we prove the hypothesis that the satisficing level of firm
performance first motivates problemistic searches to reach it, and thereafter creates slack and
thereby motivates innovative search behaviour (March and Simon, 1958; Simon, 1976; and
Weinzimmer, 2000)

Overall, our multiple regression and confirmatory factor analysis results are consistent and
significant at the 5% level of significance. We also undertake two robustness tests with two
additional proxies and with country-specific instrumental variables in the regression models,
which further substantiates our main research findings.

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However, our results do not find any influence of the control variables i.e. leverage, liquidity
and firm age on firm-risk and/or managerial risk-taking (i.e. overall search behaviour). Rather
it is interesting to note a negative coefficient value of firm-age in relation to risk and risk-
taking. These results substantiate findings of Cyert and March (1963); Hambrick and
Finkelstein (1987); and Lavie and Rosenkopf (2006), however contradict John (1993); and
Venkatesh (1989).

We prove that though firm-risk and/or managerial risk-taking can be two distinct measures, but
similar set of progenitors influence them. Our results also show that these determinants remain
influential irrespective of time, country or industry contexts. Therefore, study results would be
of immense help for firm-managers, investors, policy-makers, and other stakeholders to assess
a firm in risk-return context in both emerging and developed country perspectives. These would
help these stakeholders in strategic policy decisions and portfolio rebalancing decisions
objectively and timely.However, our study is not free from limitations. Future researchers can
examine the role of external factors such as economic, political, regulatory, institutional, etc.
in detailsin driving firm-risk and/or managerial risk-taking (i.e. overall search behaviour) along
with the progenitors studied here.

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