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Infrastructure Resilience Conference 2018

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Disruptive Events, Infrastructure Resilience and Corporate Governance

DISRUPTIVE EVENTS,INFRASTRUCTURE RESILIENCE AND CORPORATE GOVERNANCE Ettore Croci (Universita’ Cattolica,Gerard Hertig (ETH Zurich), Layla Khoja (ETH-FRS) and Luh Luh Lan (NUS)

Disruptive events alter the normal course of business. There is recent work on how this affects managerial decisions, but the literature has yet to focus on firm resilience, i.e. the capacity to recover from such events. This paper investigates whether the corporate governance of infrastructure owners and operators has a resilience impact. More specifically, we test the resilience contribution of board independence, co-opted directors, board busyness and institutional ownership using hand-collected disruptive event data. To minimize regulatory divergence issues, we focus on UK industrial firms listed on the London Stock Exchange main market for the 1995-2016 period. We use the abnormal changes in firm market value in the wake of disruptive events as a proxy of firm resilience: resilient firms should experience a less negative reaction to the disruptive events than non-resilient ones. Our starting point is that these abnormal changes are also affected by the firm’s corporate governance. We then exploit the heterogeneity in disruptive events to isolate the corporate governance component of the market reaction. First, we introduce hazard fixed effects in a regression framework. As this captures the average reaction for a given type of hazard over time for all firms (i.e. the stock price reaction expected for a firm with average corporate governance when hit by that type of shock), the coefficients of corporate governance variables now measure the incremental impact on resilience. Second, we run analyses using the sample of industry-wide disruptive events including event fixed effects, thus removing the effect for the average firm hit by that shock. Third, we revisit the results thus obtained by distinguishing between minor, moderate and large disruptive events. Our findings have implications for optimal resilience risk management policy. In particular, they allow for the identification of those corporate governance arrangements most effective in dealing with natural, human-caused and/or technological hazards.

Ettore Croci
Università Cattolica del Sacro Cuore di Milano

Gerard Hertig
ETH Zurich

Layla Khoja

Luh Luh Lan
National University of Singapore (NUS)


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