"Formal Institutions and Capital Market Integration Reduce Corporate Risk in Latin America"

Abstract

"Corporate risk has been a focal point of research in the finance field for many years, however, as a result of recent geopolitical and trade tensions, increased volatility in the marketplace, and increasing regulatory/compliance concerns, it has emerged as the primary business development concern of business. Most past studies of corporate risk have focused primarily on firm-level variables such as corporate governance structures (i.e. Corporate Boards of Directors) and personal manager characteristics, however, little is currently known regarding the impact of the general business environment on corporate risk-taking behavior. This research paper will examine the relationship between the quality of a nation’s institutions and the level of corporate risk in Latin American Countries. The sample consists of 725 companies from Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, and Uruguay for the years 2013 through 2022. We found companies operating in countries with higher quality formal Institutions as measured by the World Bank’s Worldwide Governance Indicators have a lower level of corporate risk as measured by a lower Z-score and less market volatility. These findings were consistent when using a composite index of the 6 dimensions of the governance indicators. We also observe that firms that are members of the Latin American Integrated Market (MILA) have reduced corporate risk when compared to firms that do not participate in the MILA. The moderating effect of the MILA on corporate risk is dependent upon the level of financial constraints faced by the firms involved. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2026."