Assessing the Determinants of Corporate Risk-Taking Using Machine Learning Algorithms
Abstract
:1. Introduction
2. Literature Review
3. Research Methodology
3.1. Sample and Data
3.2. Variable Definitions
3.3. Methodology
3.4. Model Predictive Performance
3.5. SHapley Additive exPlanations (SHAP) Method
4. Results
4.1. Model Predictive Performance Comparison
4.2. Which Variables Matter?
4.3. The Variable Effects on Corporate Risk-taking
4.3.1. Total Sample
4.3.2. Large and Small Enterprises
4.3.3. Robustness Tests
5. Discussion and Conclusions
5.1. Theoretical Implications
5.2. Practical Implications
5.3. Limitations and Recommendations
Author Contributions
Funding
Data Availability Statement
Acknowledgments
Conflicts of Interest
Appendix A
Variable | Definition |
---|---|
Risk_taking | The three-year standard deviation of adjusted return on assets (AdjROA), which is the ratio of earnings before interest and taxes (EBIT) to total assets (Asset) adjusted for the firm’s industry and yearly averages. |
Firm basic characteristics | |
Firm_age | The number of years between founding and the year of observation. |
IPO_age | The number of years since the IPO date. |
Size | The natural logarithm of total assets. |
SOE | Takes the value of 1 if the firm’s actual controller belongs to government and 0 if otherwise. |
Fixed_assets | Fixed assets are divided by total assets. |
Sale_growth | The annual growth of sales from t−1 to t. |
DER | The ratio of total debt to total equity. |
Leverage | The percentage of total debt to total assets. |
Firm performance | |
ROA | Net income/Total assets. |
ROE | Net income/Total equity. |
Net_margin | Net profit/Total revenue. |
Tobinq | The percentage of the market value to the book value of total assets. |
MTB | The ratio of the market value to the book value of equity. |
Sales | The natural logarithm of total sales. |
CEO characteristics | |
CEO_gender | 1 for female CEOs and 0 for male CEOs. |
CEO_age | Age of the CEO. |
CEO_duality | 1 if the CEO also serves as chairman and 0 if otherwise. |
CEO_education | If the CEO holds a postgraduate degree, CEO_education = 1, and 0 if otherwise. |
CEO_tenure | The natural logarithm of CEO tenure. |
CEO_boardexperience | It is 1 if the CEO is also a director and 0 if otherwise. |
CEO_outsidedirectorates | The total number of outside directorates a CEO holds or has held on other firm boards. |
CEO_production | 1 if the CEO has production career experience and 0 if otherwise. |
CEO_RD | 1 if the CEO has R&D career experience and 0 if otherwise. |
CEO_design | 1 if the CEO has design career experience and 0 if otherwise |
CEO_HRM | CEO_HRM = 1 for CEOs who have career experience in the human resource management area and 0 if otherwise. |
CEO_administration | CEO_administration = 1 for CEOs who have administration career experience and 0 if otherwise. |
CEO_finance | 1 if the CEO has finance career experience and 0 if otherwise. |
CEO_accounting | CEO_accounting = 1 if the CEO has accounting career experience and 0 if otherwise. |
CEO_legal | 1 if the CEO has career experience in the legal area and 0 if otherwise. |
Appendix B
Variable | Number | Mean | S.D. | Median |
---|---|---|---|---|
Risk_taking | 15,774 | 4.8582 | 10.0107 | 2.1180 |
Firm_age | 15,774 | 17.3617 | 5.5258 | 17 |
IPO_age | 15,774 | 8.9710 | 6.8454 | 7 |
Size | 15,774 | 12.7666 | 1.2053 | 12.6045 |
SOE | 15,774 | 0.0884 | 0.2839 | 0 |
Fixed_assets | 15,774 | 0.2089 | 0.1552 | 0.1775 |
Sale_growth | 15,774 | 0.1988 | 0.4106 | 0.1262 |
DER | 15,774 | 1.0105 | 1.1126 | 0.6493 |
Leverage | 15,774 | 0.4036 | 0.2082 | 0.3937 |
ROA | 15,774 | 0.0403 | 0.0568 | 0.0395 |
ROE | 15,774 | 0.0609 | 0.1196 | 0.0684 |
Net_margin | 15,774 | 0.0803 | 0.1494 | 0.0759 |
Tobinq | 15,774 | 2.0838 | 1.2827 | 1.6595 |
MTB | 15,774 | 3.7561 | 3.0469 | 2.8444 |
Sales | 15,774 | 12.0757 | 1.3690 | 11.9620 |
CEO_gender | 15,774 | 0.0688 | 0.2532 | 0 |
CEO_age | 15,774 | 49.3281 | 6.4256 | 49 |
CEO_duality | 15,774 | 0.2973 | 0.4571 | 0 |
CEO_education | 15,774 | 0.4562 | 0.4981 | 0 |
CEO_tenure | 15,774 | 3.7679 | 3.3586 | 3 |
CEO_boardexperience | 15,774 | 1.0153 | 0.1745 | 1 |
CEO_outsidedirectorates | 15,774 | 1.9769 | 3.3095 | 1 |
CEO_production | 15,774 | 0.1310 | 0.3374 | 0 |
CEO_RD | 15,774 | 0.2704 | 0.4442 | 0 |
CEO_design | 15,774 | 0.0330 | 0.1787 | 0 |
CEO_HRM | 15,774 | 0.0209 | 0.1429 | 0 |
CEO_administration | 15,774 | 0.9970 | 0.0551 | 1 |
CEO_finance | 15,774 | 0.1144 | 0.3183 | 0 |
CEO_accounting | 15,774 | 0.0959 | 0.2945 | 0 |
CEO_legal | 15,774 | 0.0079 | 0.0887 | 0 |
Appendix C
Panel A: Relative importance of firm basic characteristics variables. | ||||||||||
Variables | Linear Regression | Ridge | Lasso | Elastic Net | Bayesian Ridge | Extra Tree | Random Forest | XGBoost | Gradient Boost | LightGBM |
Firm_age | 0.073 | 0.063 | 0.050 | 0.079 | 0.133 | 5.184 | 5.221 | 2.373 | 2.650 | 4.350 |
IPO_age | 0.058 | 0.032 | 0.018 | 0.033 | 0.102 | 3.737 | 3.708 | 2.659 | 3.451 | 5.433 |
Size | 0.482 | 0.020 | 0.000 | 0.230 | 0.452 | 7.186 | 7.253 | 3.227 | 9.641 | 7.815 |
SOE | 1.090 | 0.958 | 0.821 | 1.279 | 2.009 | 0.476 | 0.447 | 3.344 | 0.088 | 0.177 |
Fixed_assets | 1.975 | 2.677 | 2.523 | 3.491 | 3.087 | 9.005 | 9.051 | 3.542 | 8.073 | 9.705 |
Sale_growth | 1.596 | 1.793 | 1.776 | 2.248 | 2.708 | 7.164 | 7.140 | 2.891 | 2.375 | 8.386 |
DER | 0.899 | 1.034 | 1.064 | 1.351 | 1.865 | 4.078 | 4.020 | 3.107 | 2.108 | 8.602 |
Leverage | 0.010 | 1.722 | 1.671 | 1.506 | 3.562 | 3.995 | 4.017 | 1.150 | 1.484 | 0.020 |
Panel B: Relative importance of firm performance variables. | ||||||||||
Variables | Linear Regression | Ridge | Lasso | Elastic Net | Bayesian Ridge | Extra Tree | Random Forest | XGBoost | Gradient Boost | LightGBM |
ROA | 32.362 | 22.170 | 23.623 | 7.987 | 4.603 | 13.111 | 12.901 | 7.360 | 32.451 | 7.028 |
ROE | 28.472 | 31.525 | 32.897 | 34.568 | 31.252 | 7.457 | 7.590 | 4.704 | 10.265 | 6.535 |
Net_margin | 10.534 | 9.984 | 9.518 | 11.284 | 14.244 | 6.963 | 7.117 | 3.864 | 7.856 | 6.791 |
Tobinq | 0.202 | 0.088 | 0.000 | 0.066 | 0.401 | 4.542 | 4.476 | 2.618 | 2.165 | 5.532 |
MTB | 0.205 | 0.188 | 0.150 | 0.264 | 0.457 | 4.801 | 4.777 | 2.956 | 3.601 | 6.240 |
Sales | 1.202 | 0.978 | 0.926 | 1.009 | 1.700 | 6.684 | 6.691 | 3.501 | 5.100 | 7.224 |
Panel C: Relative importance of CEO characteristics variables. | ||||||||||
Variables | Linear Regression | Ridge | Lasso | Elastic Net | Bayesian Ridge | Extra Tree | Random Forest | XGBoost | Gradient Boost | LightGBM |
CEO_gender | 0.860 | 0.330 | 0.209 | 0.427 | 1.498 | 0.488 | 0.502 | 3.415 | 0.019 | 0.079 |
CEO_age | 0.023 | 0.011 | 0.003 | 0.013 | 0.042 | 3.905 | 3.896 | 2.761 | 2.129 | 5.177 |
CEO_duality | 0.380 | 0.334 | 0.218 | 0.383 | 0.651 | 0.665 | 0.657 | 2.822 | 0.000 | 1.043 |
CEO_education | 0.361 | 0.310 | 0.251 | 0.402 | 0.672 | 0.659 | 0.654 | 2.036 | 0.000 | 1.142 |
CEO_tenure | 0.076 | 0.062 | 0.052 | 0.085 | 0.142 | 2.898 | 2.927 | 1.860 | 0.660 | 4.075 |
CEO_boardexperience | 0.781 | 0.580 | 0.380 | 0.722 | 1.446 | 0.119 | 0.109 | 1.309 | 0.000 | 0.000 |
CEO_outsidedirectorates | 0.080 | 0.120 | 0.107 | 0.151 | 0.150 | 2.766 | 2.788 | 3.395 | 1.443 | 2.972 |
CEO_production | 1.760 | 2.268 | 2.215 | 2.948 | 3.126 | 0.202 | 0.208 | 1.520 | 0.461 | 0.177 |
CEO_RD | 0.959 | 1.287 | 1.237 | 1.640 | 1.682 | 0.511 | 0.499 | 1.775 | 0.214 | 0.551 |
CEO_design | 3.556 | 4.276 | 4.178 | 5.538 | 6.220 | 0.641 | 0.644 | 5.058 | 0.831 | 0.335 |
CEO_HRM | 0.162 | 0.266 | 0.052 | 0.307 | 0.230 | 1.025 | 0.980 | 8.073 | 0.498 | 0.079 |
CEO_administration | 7.851 | 14.198 | 13.823 | 18.569 | 10.651 | 0.754 | 0.754 | 11.615 | 2.151 | 0.020 |
CEO_finance | 0.979 | 0.743 | 0.656 | 0.970 | 1.722 | 0.530 | 0.525 | 2.701 | 0.075 | 0.335 |
CEO_accounting | 1.404 | 1.715 | 1.581 | 2.181 | 2.493 | 0.315 | 0.310 | 2.033 | 0.135 | 0.177 |
CEO_legal | 1.607 | 0.268 | 0.000 | 0.268 | 2.703 | 0.140 | 0.138 | 2.332 | 0.076 | 0.000 |
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Model | Total Sample | Small Enterprises | Large Enterprises |
---|---|---|---|
LinearRegression | 6.5826 | 3.4296 | 5.0433 |
Ridge | 6.4993 | 3.7123 | 5.2760 |
Lasso | 6.5198 | 3.9324 | 5.0868 |
ElasticNet | 6.3337 | 3.7324 | 5.3546 |
BayesianRidge | 6.3589 | 3.4596 | 5.5579 |
ExtraTree | 19.2507 | 10.0737 | 17.8735 |
RandomForest | 19.2699 | 10.3005 | 17.5704 |
XGBoost | 13.8818 | −0.1823 | 7.1658 |
AdaBoost | 13.7653 | 17.7049 | 13.2793 |
GradientBoost | 14.3386 | 12.6980 | 11.1379 |
LightGBM | 17.3584 | 12.5887 | 18.4043 |
Model | One-Versus-One CSPA Tests | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | (11) | ||
(1) | LinearRegression | 5 * | R | R | R | R | R | ||||||
(2) | Ridge | 6 * | R | R | R | R | R | R | |||||
(3) | Lasso | 6 * | R | R | R | R | R | R | |||||
(4) | ElasticNet | 8 * | R | R | R | R | R | R | R | R | |||
(5) | BayesianRidge | 9 * | R | R | R | R | R | R | R | R | R | ||
(6) | ExtraTree | 1 * | R | ||||||||||
(7) | RandomForest | 2 * | R | R | |||||||||
(8) | XGBoost | 4 * | R | R | R | R | |||||||
(9) | AdaBoost | 0 | |||||||||||
(10) | GradientBoost | 1 * | R | ||||||||||
(11) | LightGBM | 1 * | R |
Model | Feature | R2 |
---|---|---|
AdaBoost | Firm basic characteristics only | 0.4471 |
Firm performance only | 10.8095 | |
CEO characteristics only | −273.4586 | |
Firm basic characteristics plus CEO characteristics | 3.5707 | |
Firm performance plus CEO characteristics | 9.5419 | |
Firm basic characteristics plus firm performance | 12.2544 | |
Firm performance plus firm performance characteristics plus CEO characteristics | 13.1284 |
Firm Basic Characteristics | R2 | CEO Characteristics | R2 |
---|---|---|---|
Fixed_assets | 9.4461 | CEO_age | 4.3035 |
Size | 8.1247 | CEO_tenure | 3.0405 |
Sale_growth | 6.1957 | CEO_outsidedirectorates | 2.6666 |
Firm_age | 5.6597 | CEO_administration | 0.8726 |
IPO_age | 4.6782 | CEO_design | 0.7835 |
Leverage | 4.0704 | CEO_education | 0.7217 |
DER | 4.0615 | CEO_HRM | 0.6788 |
SOE | 0.5048 | CEO_RD | 0.6556 |
Firm Performance | R2 | CEO_duality | 0.6286 |
Net_margin | 7.6391 | CEO_finance | 0.5219 |
ROA | 7.1779 | CEO_gender | 0.4150 |
ROE | 7.0045 | CEO_production | 0.3391 |
Sales | 6.9890 | CEO_accounting | 0.2377 |
MTB | 6.5973 | CEO_boardexperience | 0.0598 |
Tobinq | 5.8831 | CEO_legal | 0.0429 |
Total Sample | Category | Effect |
---|---|---|
Fixed_assets | Firm basic characteristics | Positive |
Size | Firm basic characteristics | Negative |
ROE | Firm performance | Negative |
ROA | Firm performance | Negative |
Firm_age | Firm basic characteristics | Negative |
Sales | Firm performance | Negative |
MTB | Firm performance | Negative |
Sale_growth | Firm basic characteristics | Positive |
Net_margin | Firm performance | Negative |
DER | Firm basic characteristics | Positive |
Small enterprises | Category | Effect |
Fixed_assets | Firm basic characteristics | Positive |
ROA | Firm performance | Negative |
IPO_age | Firm basic characteristics | Positive |
Size | Firm basic characteristics | Negative |
MTB | Firm performance | Negative |
ROE | Firm performance | Negative |
Sales | Firm performance | Negative |
Leverage | Firm basic characteristics | Positive |
Net_margin | Firm performance | Positive |
Sale_growth | Firm basic characteristics | Positive |
Large enterprises | Category | Effect |
ROE | Firm performance | Negative |
Firm_age | Firm basic characteristics | Negative |
Fixed_assets | Firm basic characteristics | Negative |
Sales | Firm performance | Negative |
Net_margin | Firm performance | Negative |
Size | Firm basic characteristics | Negative |
ROA | Firm performance | Negative |
IPO_age | Firm basic characteristics | Negative |
Leverage | Firm basic characteristics | Positive |
Sale_growth | Firm basic characteristics | Positive |
Total Sample | Category | SHAP Value | Effects | Sign |
---|---|---|---|---|
Fixed_assets | Firm basic characteristics | 1.0553 | 0.3130 | Positive |
Size | Firm basic characteristics | 1.0076 | −0.7559 | Negative |
ROE | Firm performance | 0.9919 | −0.4278 | Negative |
ROA | Firm performance | 0.8996 | −0.4496 | Negative |
Firm_age | Firm basic characteristics | 0.8583 | −0.6920 | Negative |
Sales | Firm performance | 0.6254 | −0.5165 | Negative |
Sale_growth | Firm basic characteristics | 0.5989 | 0.4305 | Positive |
Net_margin | Firm performance | 0.5852 | −0.2070 | Negative |
MTB | Firm performance | 0.5302 | −0.3582 | Negative |
Leverage | Firm basic characteristics | 0.4827 | 0.7540 | Positive |
Small enterprises | Category | SHAP value | Effects | Sign |
Fixed_assets | Firm basic characteristics | 1.9806 | 0.3480 | Positive |
ROA | Firm performance | 1.3139 | −0.2492 | Negative |
ROE | Firm performance | 0.9385 | −0.7008 | Negative |
Size | Firm basic characteristics | 0.9341 | −0.7123 | Negative |
IPO_age | Firm basic characteristics | 0.9220 | 0.8805 | Positive |
MTB | Firm performance | 0.8456 | −0.7019 | Negative |
Sales | Firm performance | 0.8190 | −0.3223 | Negative |
Net_margin | Firm performance | 0.6956 | 0.2678 | Positive |
Sale_growth | Firm basic characteristics | 0.6665 | 0.1323 | Positive |
Leverage | Firm basic characteristics | 0.6576 | 0.8503 | Positive |
Large enterprises | Category | SHAP value | Effects | Sign |
ROE | Firm performance | 0.9759 | −0.2915 | Negative |
Firm_age | Firm basic characteristics | 0.8756 | −0.5913 | Negative |
Net_margin | Firm performance | 0.7770 | −0.4371 | Negative |
Fixed_assets | Firm basic characteristics | 0.7712 | −0.0643 | Negative |
Sales | Firm performance | 0.7642 | −0.4005 | Negative |
DER | Firm basic characteristics | 0.6779 | 0.8604 | Positive |
Size | Firm basic characteristics | 0.6475 | −0.5721 | Negative |
ROA | Firm performance | 0.5957 | −0.5168 | Negative |
IPO_age | Firm basic characteristics | 0.5781 | −0.5108 | Negative |
Sale_growth | Firm performance | 0.5474 | 0.4613 | Positive |
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Liu, C.; Chen, Y.; Huang, S.; Chen, X.; Liu, F. Assessing the Determinants of Corporate Risk-Taking Using Machine Learning Algorithms. Systems 2023, 11, 263. https://doi.org/10.3390/systems11050263
Liu C, Chen Y, Huang S, Chen X, Liu F. Assessing the Determinants of Corporate Risk-Taking Using Machine Learning Algorithms. Systems. 2023; 11(5):263. https://doi.org/10.3390/systems11050263
Chicago/Turabian StyleLiu, Caixia, Yu Chen, Sifan Huang, Xuesheng Chen, and Feng Liu. 2023. "Assessing the Determinants of Corporate Risk-Taking Using Machine Learning Algorithms" Systems 11, no. 5: 263. https://doi.org/10.3390/systems11050263