The Impact of Foreign Ownership on Corporate Risk Taking
Behavior
Dewi Asri Rosalina, Feri Rustandi, Amir Machmud and Ikaputera Waspada
Universitas Pendidikan Indonesia, Jalan Setiabudhi 229, Bandung, Indonesia
Keywords: Corporate Risk-taking, Foreign Ownership, Indonesia.
Abstract: This study aims to analyse the impact of foreign ownership on corporate risk taking behaviour at
non-financial, non-trade, non-service and non-investing companies that are listed in the Indonesian
Stock Exchange in 2014-2016. We use explanatory survey for this study. The sampling technique
used is the purposive sampling method. We use secondary data obtained from the Indonesian Stock
Exchange and annual reports. We then analyse the data using multiple linear regressions. The
result of this study shows that foreign ownership has a positive but statistically non-significant
impact on corporate risk taking behaviour.
1 INTRODUCTION
The participation of foreign investors in investing
activities in the Indonesian stock market is increasing
due to the local government’s policy of opening
business sectors that were previously restricted to
foreign investors. This economic liberalization is one
of the government's strategies to attract more foreign
investors and expand several business sectors in
Indonesia. (Suroyo & Nangoy, 2016).
The involvement of foreign investors in the stock
market is often associated with increased risk. One
reason for this is because foreign investors often
focus on seeking high short-term earnings, so they
encourage firm management to take higher risks, a
move aimed at boosting profits (Vo, 2015). Some
studies of foreign ownership conducted in the context
of developing countries (An, Huang, Li, & Xiao,
2014; Zhao & Xiao, 2016), indicate that foreign
investors often push local firms to conduct aggressive
investment strategies, which could lead to an increase
corporate risk taking activities. Given the
government's policy to open more business sectors in
Indonesia to foreign investors, it is interesting to
examine the relationship between foreign ownership
and corporate risk taking in the Indonesian context.
2 LITERATURE REVIEW
Research on the relationship between foreign
ownership and corporate risk taking has been done
before by, among others, Boubakri, Cosset, & Saffar
(2013), Paligorova, (2010), and Vinh (2016).
However, the available literature displays mixed
results.
Several previous studies have found that foreign
investors can influence corporate risk taking through
improvements in the implementation of corporate
governance in local companies. Foreign investors
often show more initiative in improving corporate
governance practices in local firms than local
investors (Ferreira & Matos, 2008). These
improvements are beneficial in reducing risk taking
activities conducted by management (Nguyen, 2010).
In contrast, a research done by An, Huang, Li, & Xiao
(2014) states that the improvement of corporate
governance practices due to foreign investors actually
increases corporate risk taking. This is because better
corporate governance increases the transparency and
reliability of the company, resulting in increased
investor confidence.
When companies operate in countries with poor
corporate governance standards, they typically
employ a more conservative investment policy. This
is because countries with poor corporate governance
practices typically have less developed stock markets
and fewer diversification opportunities (Stulz, 2005).
164
Rosalina, D., Rustandi, F., Machmud, A. and Waspada, I.
The Impact of Foreign Ownership on Corporate Risk Taking Behavior.
In Proceedings of the 2nd International Conference on Economic Education and Entrepreneurship (ICEEE 2017), pages 164-167
ISBN: 978-989-758-308-7
Copyright © 2017 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

In countries like these most shareholders, both
foreign and local, often prefer to avoid risk (John,
Litov, & Yeung, 2008).
Research conducted by Vo (2015) found that
foreign ownership in Vietnamese companies is
associated with lower levels of corporate risk taking
activities because of a tendency for foreign investors
investing in Vietnam to focus on long-term earnings.
When foreign investors own a significant amount of
stock in a particular company, they tend to limit the
risk taking activities of the company’s management
to prevent large losses to their portfolio. (Cheng et al.,
2011).
3 METHODS
The method used in this study is explanatory survey.
Consistent with prior literature, the population of this
research are non-financial, non-trading, non-services
and non-investment companies that went public and
are listed on the Indonesia Stock Exchange (BEI) for
the period of 2014-2016. We use purposive sampling
method to determine sample for this research. The
criteria for selecting the sample under study are as
follows: (a) Firms must be non-financial, non-trade,
non-service and non-investment companies (b) Firms
must be listed in the Indonesia Stock Exchange for
the period of 2014- 2016, (c) Firms must issue
financial statements continuously during the period of
2014-2016, (d) Firms have went public for at least 6
years (e) Firms must report financial statements with
rupiah as a currency unit. Ownership data is obtained
from the website of PT Kustodian Sentral Efek
Indonesia (KSEI). Company data and financial
statements are obtained from the Indonesia Stock
Exchange website and each company's website. The
analysis technique used is multiple linear regression
analysis.
This study follows research conducted by Faccio,
Marchica, & Mura (2011) in measuring corporate risk
taking behaviour, by using the ratio of profitability to
the volatility of profitability. The ratio is as follows:
CRT = ROA
ϬROA
(1)
Foreign ownership is measured by the following
ratio:
FOROWN = ∑foreign investors’ shares
x100%
∑shares outstanding
(2)
This study uses two control variables, namely
firm size and leverage.
SIZE = Ln total assets (3)
LEV = total liabilities
total assets
(4)
Company size was chosen because large firms are
considered less risky and shows lower levels of risk
(Vo, 2016). The leverage variable was chosen
because leverage plays an important role in increasing
the company's financial risk (Boubakri et al., 2013).
4 RESULTS AND DISCUSSION
Table 1 shows the results of the regression tests that
examined the effect of foreign ownership along with
firm size and leverage as control variables on
corporate risk taking.
The regression coefficients of the study showed
varying signs, positive and negative. A positive
coefficient indicates the unidirectional effect of the
independent variable to the dependent variable,
whereas a negative coefficient indicates the opposite
effect of the independent variable to the dependent
variable. Based on table 1, foreign ownership has a
positive but non-significant effect on corporate risk
taking. The size of the firm has a negative, significant
effect on corporate risk taking. Leverage has a
positive, significant effect on corporate risk taking.
A coefficient of determination test was done to
determine the proportion of the variance in the
dependent variable that is predictable from the
independent variable. Based on table 1, a coefficient
of determination (R Square) value of 0,550 or 55%
was obtained for the model. Regression results show
that foreign ownership along with the control
variables firm size and leverage were able to explain
55% of the variance in volatility of profitability as a
proxy for corporate risk taking and the remaining
45% is influenced by other variables not examined by
this research.
According to the results of the study, foreign
ownership has a positive but non-significant impact
on corporate risk taking. These results do not support
the studies done by Vinh, (2016) and Cheng et al.,
(2011) which show that foreign ownership actually
reduces corporate risk taking behaviour. However,
these results support the studies conducted by An et
al., (2014) and Zhao & Xiao, (2016), which state that
The Impact of Foreign Ownership on Corporate Risk Taking Behavior
165

foreign ownership has a positive influence on
corporate risk taking.
Foreign ownership can increase corporate risk
taking behaviour for several reasons. One possibility
is that the involvement of foreign investors leads to
an improvement in corporate governance, which
leads to an increase in corporate risk taking (An,
Huang, Li, & Xiao, 2014). This is because
commitments and monitoring by foreign institutional
investors increase the transparency and reliability of
the company, resulting in increased investor
confidence. The implication is that managers in
companies with foreign investors are more trusted by
investors and are more likely to take risky projects.
Another possible explanation is that the increase of
foreign investment provides local firms with larger
capital and enables them to take advantage of risk-
sharing effect, meaning managers often feel they can
afford to take more risk because they have a stronger
buffer against risk. This supports the view of Umutlu,
Akdeniz & Altay-Salih, (2010).
The results show that leverage has a significant
positive relationship to corporate risk taking. This is
in accordance with the results of research conducted
by Bhagat, (2015) and Vinh, (2016). Leverage is one
of the strategies company management do when they
are seeking to increase company value, and
aggressive leveraging practices often lead to an
increase in the level of corporate risk (Moreno-
Bromberg & Roger, 2016).
The results show that firm size has a significant
negative relationship with corporate risk taking.
These results are consistent with research conducted
by Nguyen, (2010) and Boubakri et al., (2013).
Companies with greater asset levels are judged to
have a smaller risk level. In contrast, firms with
smaller amounts of assets are often in their growth
stage, so investors will usually encourage these
companies to take on riskier projects or engage in
more aggressive investment strategies (Lu, 2011).
Table 1: Results of regression tests
5 CONCLUSIONS
This study examines the relationship between foreign
ownership and corporate risk taking in non-financial,
non-trade, non-service and non-investment firms
listed on the Indonesia Stock Exchange in the period
2014-2016. Based on the results of our analysis we
find that foreign ownership tends to increase
corporate risk taking behaviour, although not on a
significant level. The results of this study are in
accordance with research conducted by An et al.,
(2014) and Zhao & Xiao, (2016), which state that
foreign ownership tends to increase corporate risk
taking behaviour. The results of this study are also in
accordance with the research conducted by Umutlu,
Akdeniz & Altay-Salih, (2010) which states that the
influence of foreign ownership on corporate risk
taking is non-significant.
The implications of our study are important for a
variety of stakeholders. It is relevant to company
shareholders, firm management, and policymakers in
emerging markets. For example, policymakers and
regulators are interested in the possible adverse or
beneficial volatility effects on stock market that
foreign investment brings, and might adjust their
economic policies accordingly. In emerging markets,
especially, strict regulations on foreign investments
tend to lead to poor economic growth, and so
governments might be interested in easing back the
restrictions on foreign investments to benefit from the
larger and more diverse capital foreign investors
bring.
Dependent
Variables
Independent
Variables
Coefficient t Test F Test
t value Sig Results F
value
Sig Results
CRT Constant ,265 4,31 ,000 43,51 ,000
b
sig
SIZE -,010 -4,32 ,000 si
g
LEV ,058 10,88 ,000 si
g
FOROWN ,030 2,12 ,036 not si
g
significance at (α): 0,05
R : ,741
a
R² : ,550
ICEEE 2017 - 2nd International Conference on Economic Education and Entrepreneurship
166

In this study, we measure corporate risk taking
using only a single proxy and two control variables,
Future studies might want to employ more proxies to
measure risk taking and sue more control variables.
Furthermore, future studies might analyze other
examine the influence of other factors of ownership
on corporate risk taking, such as local investor
ownership, ownership structure, and state ownership.
REFERENCES
An, Z., Huang, G., Li, D., & Xiao, S. (2014). Foreign
institutional ownership, risk-taking, and crash risk
around the world. Working Paper.
Bhagat, S. (2015). Size, leverage, and risk-taking of
financial institutions. Journal of Banking and Finance, 59.
Boubakri, N., Cosset, J.-C., & Saffar, W. (2013). The role
of state and foreign owners in corporate risk-taking:
Evidence from privatization. Journal of Financial
Economics, 108(3), 641–658.
Cheng, J., Elyasiani, E., & Jia, J. J. (2011). Institutional
ownership stability and risk taking: Evidence from the
life–health insurance industry. Journal of Risk and
Insurance, 78(3).
Dennis, D. K., & McConnell, J. . (2003). International
corporate governance. Journal of Financial and
Quantitative Analysis, 28(1).
Doidge, C., Karolyi, G. A., Lins, K. V., Miller, D. P., &
Stulz, R. M. (2009). Private Benefits of Control,
Ownership, and the Cross-listing Decision. Journal of
Finance, LXIV(1).
Estrin, S., Hanousek, I., Kocenda, E., & Svejnar, J. (2009).
The effects of privatization and ownership in transition
economies. Journal of Economic Literature.
Faccio, M., Marchica, M.-T., & Mura, R. (2011). Large
shareholder diversification and corporate risk-taking.
Review of Financial Studies.
Ferreira, M. A., & Matos, P. (2008). The colors of
investors’ money: The role of institutional investors
around the world. Journal of Financial Economics,
88(3), 499–533.
John, K., Litov, L., & Yeung, B. (2008). Corporate
Governance and Risk-Taking. The Journal of Finance,
63(4), 1679–1728.
Lu, J. (2011). Size, Leverage and Risk Taking.
Moreno-Bromberg, S., & Roger, G. (2016). Leverage and
Risk Taking. Working Paper.
Nguyen, P. (2010). Corporate governance and risk-taking :
Evidence from Japanese firms. Pacific Basin Finance
Journal, (April).
https://doi.org/10.1016/j.pacfin.2010.12.002
Paligorova, T. (2010). Corporate Risk Taking and
Ownership Structure Corporate Risk Taking and
Ownership.
Stulz, R. (2005). The limits of financial globalization.
Journal of Finance, 60, 1595–1638.
Suroyo, G., & Nangoy, F. (2016). Indonesia eases foreign
ownership in “Big-Bang” liberalization.
Umutlu, M., Akdeniz, L., & Altay-Salih, A. (2010). The
degree of financial liberalization and aggregated stock-
return volatility in emerging markets. Journal of
Banking and Finance, 34(3), 509–521.
https://doi.org/10.1016/j.jbankfin.2009.08.010
Vinh, V. X. (2016). Foreign Investors and Corporate Risk
Taking Behavior in an emerging market. Finance
Research Letters.
https://doi.org/10.1016/j.frl.2016.04.027
Vo, X. V. (2015). Foreign ownership and stock return
volatility–evidence from Vietnam. Journal of
Multinational Financial Management, 30, 101–109.
Vo, X. V. (2016). Foreign ownership and stock market
liquidity-evidence from Vietnam. Afro-Asian Journal
of Finance and Accounting, 6(1).
Zhao, S., & Xiao, S. (2016). Ownership Structure and
Corporate Risk Taking : Evidence from an Emerging
Market, 2016(December), 1–21.
The Impact of Foreign Ownership on Corporate Risk Taking Behavior
167