Assessing the governance–risk nexus: the role of firm size and free cash flow in Indian context

Purpose This study aims to examine the impact of corporate governance (CG) on corporate risk-taking by considering the moderating effect of firm size and free cash flow. Design/methodology/approach The present study is based on a sample of 261 Indian firms spanning the period from 2014 to 2023. Suitable panel data models have been used for the analysis. Additionally, the system generalised method of moments model is used to address potential endogeneity issues and provide robust results. Findings The results disclose that robust CG practices lead to a reduction in corporate risk-taking, with firm size and free cash flow playing a significant moderating role in this relationship. The negative impact of CG on corporate risk-taking weakens for larger firms, underscoring the importance of size in shaping the dynamics between CG and corporate risk-taking. Additionally, findings show that the risk-reducing impact of CG strengthens as free cash flow increases, suggesting that governance amplifies risk control when cash is abundant. Originality/value The paper validates the significance of strong CG on risk-taking behaviour. While prior literature has established the roles of firm size and free cash flow in investment decisions, to the best of the knowledge, limited prior research has explicitly examined their moderating effects on the relationship between CG and corporate risk-taking. This study fills this gap by demonstrating how these critical firm-specific factors alter the efficacy of governance mechanisms, particularly within the unique institutional context of India.