Navigating Global Risks: The Influence of International Diversification on Corporate Risk-Taking and the Critical Role of Independent Directors

This study explores the relationship between international diversification and corporate risk-taking, and the moderating role of independent directors’ duties. Using a sample of Chinese manufacturing firms from 2008 to 2021, we employ ordinary least squares regression models to analyze how foreign sales to total sales ratio (FSTS) impacts risk, measured by the standard deviation of daily and weekly stock returns. To address endogeneity concerns, we utilize the manufacturing industry-specific average internationalization (MFSTS) as an instrumental variable. The findings indicate that international diversification significantly increases corporate risk-taking, confirming that expanding into foreign markets heightens operational complexities and uncertainties. Furthermore, the presence and diligence of independent directors mitigate these risks, as evidenced by negative interaction terms between FSTS and measures of independent directors’ duties. These results underscore the critical role of independent directors in corporate governance, particularly in firms with high international exposure. This study contributes to the literature by providing empirical evidence from the Chinese market, emphasizing the importance of robust governance mechanisms in managing global business operations. The findings have significant implications for policymakers and practitioners, highlighting the need for effective oversight to mitigate the risks associated with international diversification.