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A firms appetite to take risk when exposed to a growth opportunity is vital to its

long-term performance. This article focuses on establishing relationships between

the level of equity ownership by different stakeholders with corporate risk taking.
This article identifies three different stakeholders of the firm namely corporate
insiders, blockholders (passive as well as active), and institutional investors and
their influence on the risk taking potential. The author put forward six hypotheses
and tried to test them empirically.
Primarily, the author cites different theories and their divergence in views about the
effect of the level of ownership by corporate insiders and their potential effect on
the risk taking ability of the firm. Various theories proposed that with an increase in
the level of ownership, corporate risk taking increases because the corporate
insiders wants to align their interests with that of the shareholders in order to
enhance their wealth. But some theories suggest that with an increase in insiders
wealth in the firm, the risk appetite of the insider decreases since its wealth
becomes more concentrated. The author has cleverly linked it with diversification,
divestments, mergers and corporate restructuring strategies. The empirical studies
have also validated author hypothesis that the relationship between the level of
ownership and the corporate risk taking is positive till 7.5% and beyond that it
The author then cited various theories validating the fact that the blockholders and
institutional investors exert heavy influence in the firms risk taking decisions when
provided with growth opportunities. Various theories assert that with an increase in
the level of ownership by blockholders and institutional investors, corporate risk
taking increases. However, the empirical results have invalidated the relationship
between blockholder and the corporate risk taking while validated the latter
relationship. This theory explains why there are altercations between managers and
stakeholders regarding various issues such as Mergers, when shareholders would
see firms growth potential, but managers aka corporate insiders would give
precedence to their own profitability depending upon the level of ownership they
hold in the firm. This is a typical example of agency costs problem.