Competition laws and corporate risk-taking around the world

Using a new dataset on international competition laws, we examine the relationship between country-level competition laws and corporate risk-taking in 58 countries from 1990 to 2010. Consistent with the disciplinary effect hypothesis, we document robust evidence of a negative relation between corporate risk-taking and the stringency of competition laws. The negative relation between competition laws and corporate risk-taking is more pronounced among financially constrained firms and less pronounced among firms situated in high-trust jurisdictions. Further analysis shows that competition laws affect corporate risk-taking by mitigating agency problems and enhancing information transparency. Overall, these findings are consistent with the view that competition plays a critical external corporate governance role in shaping corporate behaviors.