The Effect of Index Inclusion on Corporate Risk-taking Behavior

Abstract

This study examines the effect of SET 50 Index inclusion on corporate risk-taking behavior using regression discontinuity designs. Because of agency problems, firms’ levels of risk-taking can be suboptimal from the perspective of well-diversified shareholders. I hypothesize that inclusion in SET 50 Index would increase firms’ percentage of institutional ownership and investors’ awareness of the firms. These would in turn improve monitoring of the firms and thus raise the levels of risk-taking. The results, however, suggest that SET 50 Index inclusion does not increase the percentage of institutional ownership or the levels of risk-taking. Nevertheless, I find statistically significant positive effect of the inclusion on number of shareholders and payout ratio, which is probably best interpreted as a bonding expenditure voluntarily incurred by management. Overall, these results do not support the notion that SET 50 Index inclusion improves monitoring of the included firms.