International Journal of Managerial Finance

Market risk, corporate governance, and the regulation during the recent financial
crisis: The French context
Mouna Aloui, Bassem Salhi, Anis Jarboui,
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Market risk
Market risk, corporate and corporate
governance, and the regulation governance
in France
during the recent financial crisis
The French context
Mouna Aloui Received 20 June 2018
Revised 23 October 2018
Faculty of Economics and Management of Sfax, University of Sfax, Sfax, Tunisia 17 December 2018
1 January 2019
Bassem Salhi 16 January 2019
Majmaah University, Al Majmaah, Saudi Arabia, and Accepted 16 January 2019
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Anis Jarboui
Institute of Business Administration of Sfax, University of Sfax, Sfax, Tunisia

Abstract
Purpose – The purpose of this paper is to study the impact of some corporate governance mechanisms on
the market risk (stock price return and volatility, exchange rate) and on the exchange rate and Treasury Bill
during the financial crisis. In order to better clarify the firms’ resistance to financial crises, the effect of
exchange rate, Treasury Bill and the market risk are also considered.
Design/methodology/approach – The study uses a sample data of the SBF 120 on a panel of 99 French
firms over the period between 2006 and 2015 divided into three sub-periods: the first sub-period, which covers
the period between December 31, 2006 and December 31, 2009, was characterized by the outbreak of the
subprime crisis. The second sub-period considers the sovereign debt crisis in Europe between December 31,
2010 and December 31, 2012. The last sub-period includes the post-crisis period (December 31, 2013 to
December 31, 2015). The GARCH and BEKK models are used to capture the effect of volatility and conditional
heteroskedasticity of both corporate governance and market risk.
Findings – The paper found that during the financial crisis (first sub-period, the sovereign crisis period), the
high shareholders’ protection had a positive and significant impact on the stock market returns. Furthermore,
the shareholders’ protection, the Treasury Bill, the institutional investors, the board’s size, had a negative and
significant effect on the stock returns volatility. During the post-crisis period, the high protection and the
board’s size had a negative and significant effect on the volatility of the stock returns.
Research limitations/implications – This result implies that during the financial crisis, the high
shareholders’ protection played a role in increases the stock market return and minimized the stock
return volatility.
Practical implications – This study helps in improving the legal protection of investors and helps
managers, shareholders and investors to evaluate their investments. This study also provides implications for
policymakers and legal environment in order to evaluate the importance of the current corporate governance
frameworks in place.
Originality/value – This result implies that the institutional investors, as the results suggest, should follow
the shareholders’ protection in all the countries to make decisions about their investments since the high
shareholders’ protection increases the firm’s stock returns and decreases the stock return volatility.
Keywords Exchange rate, Institutional investors, GARCH–BEKK model, Protection of shareholders,
Stock returns volatility
Paper type Research paper

1. Introduction
It should be stated that corporate governance is an incorporated set of internal and external
mechanisms designed to help the shareholders exercise an appropriate supervision of
companies to maximize their values (Berle and Means, 1932; Williamson, 1984). In fact, a recent
investigation has analyzed how corporate governance can be adapted to the environmental
International Journal of Managerial
Finance
The author would like to thank deanship of scientific research at Majmaah University for supporting © Emerald Publishing Limited
1743-9132
this work under Project No. 55-1440. DOI 10.1108/IJMF-06-2018-0177
 IJMF changes to sustain the firms’ survival (Agrawal et al., 1999; Scholtens, 2006). Moreover, this
investigation has discovered that companies in a rapidly changing business environment
tend to adjust their governance structure to the prediction of the agency theory; however, it
has not analyzed how corporate governance can be adapted to unexpected environmental
changes, such as financial crises. In fact, the current global financial crisis, which was caused
by the US subprime loans, has affected the developed economies, mainly France.
Therefore, companies found it hard to access capital markets to gain external financing
(Kroszner et al., 2007). Moreover, investors became more pessimistic about the market and
were even more conservative in their consumption and investment behavior. In fact, during
the 2008/2009 global financial crisis, a number of weak corporate governance practices
appeared in the world. Although this was not limited to France, companies suffered from
over-leveraging (Hood et al., 2006), absence of transparency, financial disclosure and
accountability (Mitton, 2002), a poor legal protection of minority investors against
expropriation by corporate insiders (Claessens et al., 1999). These issues were aggravated by
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a lack of corporate takeovers in France due, in part, to the legislators who have long been
worried about the protection of companies’ interests by limiting the managers’ or majority
shareholders’ ability to use their position or influence to carry out tunneling, related party
transactions or any other act prejudicial to the interests of the minority shareholders.
Furthermore, the rules governing self-destruction thus imposed a protective legal
framework defining the terms and conditions for the execution of transactions involving
conflicts of interest by giving the minority shareholders the means to control the
transactions made to be civilly or criminally held responsible. In addition to that, the global
financial crisis revealed some shortcomings of risk management. During this crisis, it
appeared that the last result of modern risk management is a “risk management of nothing”
(Power, 2009), a weakness of the different mechanism really destined for prohibiting the
worst consequences of risks.
Moreover, in the aftermath of the crisis, risk management exercise came under a heavy
criticism (Sorkin, 2010). In fact, several studies showed that corporate governance failure and
risk management were the primary cause of the 2008–2009 crisis. Insufficient risk management
and unsuitable remuneration practices in the financial sector are placed outright in the center of
the financial crisis. Risk management represents the most critical factor in the context of a set of
practices and of corporate governance structures. After the financial crisis, companies repeated
their research to reduce their exposure to exchange rates, interest rates and the difficult
fluctuations in commodity prices through hedging instruments (exchange rate swaps and
interest rates). Furthermore, these companies used a corporate governance model that
accompanied their risk-control efforts through some planned practices (audit committee and the
board of directors). In this context, Sikarwar and Nidugala (2018) found that ownership
structure, in which the agency costs and monitoring problems are lower, is associated with a
reduced level of exchange rate exposure. Moreover, the authors revealed that a currency
derivative practice is associated with a greater reduction of the exchange rate exposure for firms
that have lower agency and monitoring problems obtained from their ownership structure.
In fact, the aim of this investigation is threefold: first, to investigate the effects of
corporate governance on the stock market during the financial crisis using the board of
directors and the institutional investor as two corporate governance mechanisms that can
enhance the protection of the investors’ rights; second, to study whether firms in compliance
with a higher or lower shareholder’s protection decreased the financial volatility during the
financial crisis; and finally, to further examine the relationship between the market risk
(exchange rates and the stock market) and some corporate governance variables in order to
better clarify the firms’ resistance to financial crises.
Actually, several studies about corporate governance, shareholders’ protection and stock
market focused on the emerging and European companies. However, French listed firms
 from the SBF 120 did not receive any specific investigation on this topic, in general, and on Market risk
the French institutions, in particular. France has an institutional setting similar to that of and corporate
most continental countries. It was described by La Porta et al. (1997) as a civil law country governance
characterized by a high concentration of ownership, weak investor’s rights and boards
which are not independent in controlling the shareholders. Therefore, this seems to be a in France
favorable context to study these inter-relationships. In fact, our contribution to this
literature consists, first, in examining the legal protection of minority shareholders’ interests
of French listed companies, to the best of our knowledge, this is the first paper to have
examined corporate governance and the protection of investors in the French listed
companies; second, in understanding the influence of the market risk on the stock market;
and finally, in using a GARCH–BEKK model rather than the OLS employed by most studies
to capture the time-varying volatility in the stock returns. An appealing property of the
GARCH–BEKK is that the model ensures a positive definite and conditional covariance
matrix; however, we rather interpret the variations of the stock market returns based on
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the accessible evidence on corporate governance and risk management in the French Firms.
This paper is structured as follows. Section 2 presents the French legal environment,
which is developed, in Section 3 through a description of literature reviews. Section 4
presents the methodology and data, introduces the GARCH–BEKK method tools used to
identify the relationship between corporate governance, investors’ protection, and market
risk. Then, the empirical results and discussions, are presented and described in the
empirical finding section. The final section concludes and raises some remarks.

2. The French legal environment

We have selected the French market, which trades second-listed shares between several
European countries for the following reasons: first, the vision of the political channel
suggests that common law has evolved to protect private landowners against the Crown
(the government). This legal protection enables private owners to carry out financial
transactions with confidence and positive influence. In contrast, the French and German
civil codes were created to consolidate the power of the State by placing the government
above the law. Thus, the civil law tradition favors the development of institutions that
promote the State primacy with negative implications for financial development. Second, the
channel of adaptability postulates that legal traditions differ in the way that they evolve
with changing conditions. In fact, several researchers, such as Priest (1977) and Rubin and
Bailey (1994), argued that the common law gives judges considerable discretion to replace
ineffective rules with effective ones. As a consequence, common law countries effectively
reduce the gap between the contractual needs of the economy and the capacity of the legal
system, which promotes financial development more effectively than in other more rigid
systems. The tradition of civil law generally rejects jurisprudence and relies exclusively on
statutory law to resolve conflicts. This rigidity of civil law systems leads to the decline of the
effectiveness of contract law, with negative repercussions on the financial development.
In a series of articles, La Porta and his co-authors (La Porta et al., 1997, 1998, 2002, 2006)
showed that the legal protection of investors is strongly linked to institutional development
variables. For example, the quality of protection offered to minority shareholders in a
country is closely related to the legal origin of the country. The authors concluded that
countries following the English common law traditions generally have higher levels of
institutional development than those following the civil law traditions.

3. Literature review
This study focuses on the previous research studies related to corporate governance and
risk management.
 IJMF 3.1 Corporate governance and stock market
3.1.1 Board’s size and the stock market. The boards’ size is responsible for the identification,
assessment and management of all types of risks, including operational risk, market risk
and liquidity risk (FRC2010b). The debate regarding this relationship, which has long been
ignored as an essential element in the process of development of the stock markets,
minimizes the risk of the investor. Other researchers, such as Jensen (1993), indicated that a
smaller board is more efficient in its controlling function, while a larger one tends to give the
control power to the CEO. In this context, Minton et al. (2011) found that the board’s size
negatively affects the market risk. Similarly, in a recent study, Kryvko and Reichling (2012)
have examined the European banks and found a negative nexus between the board’s size
and the risk of the company. Another reasonable clarification provided by Kirkpatrick
(2009) showed that poor boards bear the altitude of a culture of avarice and excessive
remuneration, which leads financial executives to take risks that cause financial crises. On
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the other hand, some recent research studies, such as those of Koulakiotis et al. (2013) and
Huang et al. (2011), have indicated that the board’s size has a significant impact on the price
volatility. Moreover, Vo (2016) argued that the firm’s size has a negative and significant
impact on the stock prices of less risky larger companies. By combining these previous
insights, we set our first hypothesis:
H1. The impact of the board’s size on the stock market volatility is negative.
3.1.2 The institutional investor and the stock market. According to Pound (1988),
institutional investors know how to monitor the complete professional skills more than the
individual investors to improve the monitoring mechanisms and reduce the agency problem.
We believe that this will strengthen the confidence of investors in companies so that the
panic in selling stocks by investors will be eased, and will also stabilize the share price and
reduce its excessive reaction and fluctuation to political crises. On the other hand, Boehmer
and Wu (2009) suggested that the institutional investors have a role of price stabilizers
whose presence decreases the volatility, and who swiftly detect mispricing and exploit the
arbitrage profit by trading against mispricing. Moreover, many researchers found a positive
nexus between the institutional investors and the stock return volatility (Dennis and
Strickland, 2002). For example, Sias (1996) indicated that an increase of institutional
ownership leads to a rise of the stock return volatility. This argument explains the positive
nexus between the institutional investors and the stock return volatility, which implies that
institutional investors are more enhanced and informed than other individual investors.
In this context, Lin et al. (2007) indicated due to the informational advantage, once the
transaction is localized, institutional investors are willing to negotiate at higher prices for
informative rents. On the other hand, a growing literature asserts that institutional investors
can cause price differentials and volatility increase (Shleifer and Vishny, 2002; Kim and
Nofsinger, 2005; Wang, 2007) to disappear, which makes us set the following hypothesis:
H2. The institutional investors have a negative effect on the stock market volatility.
3.1.3 The shareholder’s protection and the market risk. La Porta et al. (1998) argued that in
countries with vulnerable investor’s protection rights, stockholders can have to rely on
another means of protection. These authors also indicated that “with a poor investor’s
protection, ownership concentration becomes a substitute for legal protection because only
large shareholders can hope to receive a return on their investment.” By contrast, investors
are ready to have positions and finance companies in countries where legal rules are
extensive and well enforced. Furthermore, La Porta et al. (1997, 1998, 2002) examined several
attitudes of legal protection of foreign investors across 49 countries and indicated that these
institutional characteristics are essential for capital market evolution, corporate governance
and firm’s value. Moreover, they suggested that legal protection is high in English common
 law countries but low in French German and Scandinavian civil law ones. In this context, Market risk
Lipartito and Morii (2009) found a positive relationship between the protection of the minority and corporate
shareholders and the company’s independent board. For their part, Koulakiotis et al. (2013) governance
indicated that shareholder’s protection has a minor effect on the stock market returns;
therefore, we propose the following hypothesis: in France
H3. The impact of the index of shareholder’s protection on the stock market volatility
is negative.

3.2 The exchange rate, Treasury Bill and the market risk
Actually, a few studies have attempted to jointly examine these relationships (as the
exchange rates and the Treasury Bill have an impact on the stock return volatility). On the
other hand, Karolyi and Stulz (1996) indicated that the yen/dollar foreign exchange rates,
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the Treasury Bill returns and the industry impacts have no measurable effect on the US and
Japanese return correlations. Moreover, Antoniou et al. (1995, 1998) found that futures
trading has a significant impact on the co-movements across the markets. In this context,
Borokhovich et al. (2004) found that there is a positive nexus between the monitoring of
outside directors and the firm’s use of the interest rate derivatives. On the other hand,
Koulakiotis et al. (2013) argue that the exchange rates and the Treasury Bill have a
significant effect on the stock return volatility. In addition, Ulrich Hege et al. (2018) found
that the substantial improvements in governance standards robustly lead to less foreign
exchange exposure; therefore, we propose the following hypothesis:
H4. The exchange rates have a positive effect on the stock market volatility.
H5. The impact of the Treasury Bill on the stock market volatility is positive.
H6. The impact of the market index on the stock market volatility is positive.

4. Methodology and data

4.1 Data
We used a panel data composed of 99 French companies over a ten-year period between
(December 31, 2006 and December 31, 2015) divided into three sub-periods: the first
sub-period, which covers the period between December 31, 2006 and December 31, 2009),
was characterized by the outbreak of the subprime crisis, which affected the global stock
market. The second sub-period considers the sovereign debt crisis in Europe between
December 31, 2010 and December 31, 2012, during which the sovereign debt crisis affected
the French economy, in general, and the French firms listed on the SBF 120, in particular.
The last sub-period includes the post-crisis period (December 31, 2013 to December 31,
2015). For this reason, we limited our study to the period preceding this date. The sample in
this study consists of 99 French companies listed on the SBF 120 index between 2006 and
2015. This sample includes all the firms in the financial sector, such as banks and insurance
companies; however, we discarded firms with missing data to end up with 99 firms.
Our empirical study focuses on the French companies making up the SBF 120 index on
December 31, 2006, as it is the most representative of the various activities of the French
economy. For the data collection, we have used two sources of secondary data, namely, the
database “invest.seechos.fr” and the database “investor.” It should be recalled that the latter
provides the list of companies listed on various stock market indices. This database includes
activity reports, annual reports, balance sheets, statements of results, etc. These different
documents can be downloaded directly from the sites of the different companies.
Our data (accounting, financial and governance) are extracted almost entirely from this
database of 99 companies which covers the period 2006–2015. To complete our data
 IJMF collection, we used the “invest.leechos.fr” database from which we drew 21 companies that
were not provided by the downloaded documents. Then, we eliminate from the sample of
our study all the companies with missing data.
After the selection operation, our final sample consists of 99 companies over an analysis
period of 10 years (2006–2015).
Earlier literature focused on the relationship between corporate governance and risk
management. For example, O’Neill and Xiao (2012), Ntim et al. (2013) and Villanueva-Villar
et al. (2016) analyzed this relationship during the pre- and post-2007/2008 global financial
crisis periods, and Shah et al. (2017) found a negative relationship between CEO’s bonuses
and banking risk in the pre-financial crisis period.
Table I summarizes the sample composition and presents the distribution of firms across
sectors: oil and gas and basic industrial materials, consumer goods and services, financials
and technology, which represent a large portion of the total number of firms, and the
remaining sectors lack data.
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4.1.1 Dependent variables. The present study is mainly based on the stock return
volatility. This indicator is widely used in the literature to measure the market volatility
(Chen et al., 2013; Koulakiotis et al., 2013). In fact, it focuses on 99 French companies
composing the SBF 120 Index. For the data collection, we were required to use a data source,
i.e., the database “http://investir.lesechos.fr.” The sample period runs from 2006 to 2015 and
the annual returns are computed as geometric and arithmetic growth rates, respectively.
In particular, we used the formula: ðP t P t1 Þ=ðP t1 Þ for the annual data.
4.1.2 Independent variables. 4.1.2.1 Shareholder’s protection index. The protection of
investors, in general, is supposed to have a better quality when it offers investors some
legal benefits. Commercial laws come from two legal traditions: the “ordinary law” and
“civil law” (Watson, 1974). Indeed, the civil law tradition belongs to the French, German
and Scandinavian family, while the legal tradition of common law is derived from the
English law. The rules that protect investors from several sources are: the commercial
code, the company law, the security law, the family law, the competition law, next to other
sources, such as regulations issued by the stock exchanges and the code over the
accounting and financial information (La Porta et al., 1999, 2000a, b). Then, we present the
various rights granted to shareholders using a single index IND (13) gathering eight
rights used by La Porta et al. (1998) and other measures used by Glaeser and Andrei
(2002). The investors’ protection ranges from 0 to 13, where higher values (10–13)
correspond to better levels of investors’ protection. For a low shareholders’ protection, the
values correspond to 0–9.
This index comprises the following rights:
(1) Proxy by e-mail.
(2) Depositing shares before the vote at a general meeting is not mandatory.

Sector distribution SBF 120

Oil and gas and basic materials 10

Industrials 19
Consumer goods and health care 10
Consumer services 30
Financials 20
Table I. Technology 10
Sample composition Total 99
 (3) Cumulative voting for directors is allowed and oppressed minorities are protected. Market risk
(4) The preferential subscription rights. and corporate
(5) The percentage of share capital required to call on for extraordinary shareholders’ governance
meeting is less than 10 percent. in France
(6) The right to receive dividends.
(7) The action at voting where there are no shareholders’ voting limits.
(8) The supervisory and the executive boards are elected by the general meeting of the
shareholders.
(9) Shareholders owning 10 percent of the company’s shares have the right to check the
attendance register during general meetings.
(10) The duration of the management team of mandates is four years (instead of six).
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(11) The holding of bearer shares is allowed.

(12) The ability to acquire preferred shares (even without voting rights).
(13) The existence of a quorum for votes requiring the presence of shareholders.
4.1.2.2 Board’s size. The board’s size is measured by the total number of directors on the
board. This measure has been used by several previous corporate governance research
studies (Huang et al., 2011).
4.1.2.3 Institutional investors. Institutional investors include funds, insurance
companies, banks, corporate annuity, trust companies and financial companies. In this
sense, Sias et al. (2006) found that higher institutional shareholdings would have a positive
impact on the stock prices.
4.1.2.4 Exchange rate. The exchange rate is an essential price in the economy as it
affects the value of the assets possessed by both outside portfolios and direct investors as
well as the ones maintained by domestic investors. In this context, Koulakiotis et al. (2013)
indicated that the exchange rate affects the stock return volatility.
4.1.2.5 Treasury Bill. The Treasury Bill is the appointed interest rate debt security delivered
by a national government. This measure was used by few studies (Koulakiotis et al., 2013).

4.2 Methodology
Various researchers analyzed the effect of corporate governance mechanisms on many
types of risks (market risk, liquidity risk, credit risk and operational risk) using different
models to show this relationship. For example, Chen et al. (2013) used panel data to show the
relationship between the internal mechanisms of corporate governance and the volatility of
the stock price returns. On the other hand, Rhee and Wang (2009) studied the effect of an
internal mechanism of corporate governance on liquidity risk using the Granger causality
test to show this relationship. For their part, Lei et al. (2013) used the linear regression to
explain the relationship between corporate governance and liquidity risk. In fact, our study
is based on the GARCH and GARCH–BEKK models because they are rarely used in this
type of research.
4.2.1 GARCH model. Equation (1) and (2) show the return and volatility equations,
respectively, which have been used in the investigation of the impact of corporate
governance variables on the market risk and the error terms:
r t ¼ b0 þb1 s1 þb2 s2 þet

et =pt1  T ð0; ht Þ; (1)

 IJMF s1 denotes the variable of corporate governance of the average board’s size. s2 includes the
market risk (exchange rate, stock market return and Treasury Bill). In this context,
Bollerslev (1986) proposed the following univariate GARCH model:

ht ¼ a0 þa1 h1 þa2 e2t1 : (2)

4.2.2 GARCH–BEKK model. The variance equation of the GARCH–BEKK model is
modified and then, the constrained GARCH–BEKK model takes the following form:



H t ¼ cc0 þ B0 H t1 B  1 þZ 1;t1 þZ 2;t1 þA0 ðet1 et1 Þ  A; (3)

where Ht is the matrix of the conditional variance of is εt; Ht−1 is the matrix of the lagged
conditional variance of εt; e0t1 is the matrix of the error terms in period, t−1, Z1,t−1; and Z2,t−1
are the futures contracts shocks at period t−1. In the multivariate GARCH (1, 1), the BEKK
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representation which was proposed by Engle and Kroner (1995) guarantees, by

construction, that the variance–covariance matrices in the system are positive; therefore,
the definite Ht takes the following form:
 
  2 e1;t1 e2;t1 e1;t1 e3;t1 e1;t1 e4;t1 
 At1 At2 At3 At4 0  e1;t1
  
0 A22 0 0   e2;t1 e1;t1 e2;t1
2
e2;t1 e3;t1 e3;t1 e4;t1 
0 
H t ¼ C0C0 þ   
0 0 A33 0   e3;t1 e1;t1 e3;t1 e2;t1 e23;t1 e3;t1 e4;t1 
  
0 0 0 A44   e4;t1 e1;t1 e4;t1 e2;t1 e4;t1 e3;t1 e24;t1 


  0  
A At2 At3 At4  B11 Bt2 Bt3 Bt4   B11 Bt2 Bt3 Bt4 
    
0 A22 0 0  0 B22 0 0  0 B22 0 0 
    
   H t1  : (4)
0 0 A33 0  0 0 B33 0  0 0 B33 0 
    
0 0 0 A44  0 0 0 B44  0 0 0 B 44 

The log-likelihood function (L) is as follows:

X
L¼ T log f ðxt jI t1 ; yÞ: (5)
t¼1

5. Empirical results and discussions

Table II, which is organized in two panels, presents a description of the data. The initial
panel of the table contains the central descriptive statistics of the high levels of
shareholders’ protection. As it can be found, all the variables (stock return volatility,
institutional investors, shareholders’ protection, exchange rates, Treasury Bill and board’s
size) show a positive average. Then, the largest average gains are associated with the
Treasury Bill (2.820), while the stock return volatility shows the lowest average (0.169).
The level of risk measured by the standard deviation has its lowest value for the exchange
rate (0.000); however, and considering this criterion, the stock return volatility seems to be
the riskiest (0.851). In the first panel of Table II, all the variables in the table do not follow a
normal distribution, due to the presence of fat tails (i.e. high levels of leptokurtosis) and
skewness (negative asymmetry in the board’s size).
Then, the second panel shows the main descriptive statistics of the lowest levels of
shareholders’ protection. In fact, there are differences regarding the first panel. The primary
 Mean Variance Skewness Kurtosis
Market risk
and corporate
Shareholders’ protection “High” governance
SBF 120 0.169785 0.851913 6.300151 61.426594
Institutional investors 0.377604 0.085123 0.484719 −0.907466 in France
Shareholder’ protection 1.030064 0.00089 0.397672 −1.194011
Exchange rate 2.007108 0.000049 0.454862 −0.623050
Treasury Bill 2.820930 0.326016 0.048987 −1.646187
Board size 1.090817 0.020644 −0.772521 1.339174
Shareholders’ protection “Low”
SBF 120 0.130576 0.815629 6.073636 55.701625
Institutional investors 0.361853 0.093054 0.481185 −1.145878
Shareholder’s protection 0.904871 0.004317 −2.379680 7.418841
Exchange rate 2.007125 0.000048 0.451977 −0.618582
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Treasury Bill 0.325362 2.821250 0.049728 50.693834 Table II.

Board size 1.079402 0.023951 −1.185068 2.065679 Summary statistics

difference is that we can see that the largest average gains are associated with the exchange
rates (2.007), while the stock return volatility shows the lowest average (0.130). The second
difference is skewness (negative asymmetry in the board’s size and shareholders’ protection).
Table III shows the correlation matrix between the variables employed in the regression
analysis (higher and lower levels of shareholders’ protection). For the high levels of
shareholders’ protection, the correlation coefficient between the exchange rates and the
Treasury Bill was found to be 0.7212, which confirms that the increase of the Treasury Bill
securities leads to an appreciation of the exchange rates in which they are denominated.

Shareholders’ Exchange Treasury

Variables protection SBF 120 rate Bill CEO INST INV

Shareholders’ protection “High”

Shareholders’ protection 1.00000 0.1102* −0.0053 −0.0049 0.0341 −0.0083
0.0410 0.9214 0.9279 0.5284 0.8779
SBF 120 1.000000 −0.0392 0.0328 −0.0569 0.0809
0.4686 0.5449 0.2930 0.1345
Exchange rate 1.000000 0.7212 −0.0569 0.0108
0.0000 0.2930 0.8420
Treasury Bill 1.000000 0.0284 0.0198
0.6001 0.7143
Board size 1.000000 0.0539
0.3188
Institutional investors 1.00000
Shareholders’ protection “Low”
Shareholders’ protection 1.00000 0.1201 −0.0082 −0.0097 −0.0032 −0.0663
0.0109 0.8623 0.8370 0.9461 0.1613
SBF12 1.000000 −0.0456 0.0047 0.1679 −0.0077
0.3351 0.9214 0.0004 05773
Exchange rate 1.000000 0.7194 0.0314 −0.0264
0.0000 0.5069 0.5773
Treasury Bill 1.000000 0.0644 −0.0046
0.1739 0.9223
Board size 1.000000 −0.0363
0.4430 Table III.
Institutional investors 1.000000 Correlation matrix
 IJMF Additionally, the absolute correlation coefficients between some variables (shareholders’
protection and Treasury Bill, shareholders’ protection and institutional investors, the stock
return volatility and the exchange rates, the stock returns and the board’s size, the exchange
rate and the board’s size) are lower than 0.1 (−0.0049, −0.083, −0.0392, −0.0569 and −0.0569,
respectively). Therefore, putting these variables in one regression will not resolve the
problem of collinearity. Concerning the lower levels of shareholders’ protection, we also
discovered that the correlation coefficient between the exchange rates and the Treasury Bill
is 0.7194.
Table IV presents the results of the impact of corporate governance variables,
shareholders’ protection, the exchange rates and the Treasury Bill on the stock return
volatility. These results were estimated for two cases: higher and lower levels of
shareholders’ protection. In both cases, we found that all the variables significantly affect
the stock return volatility of the SBF 120. Additionally, Table IV shows that all the variables
in our study are well adapted to an order 1 of the GARCH model (GARCH (1, 1)). These
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models are very appropriate since the coefficient of regression (β) and the coefficients of the
ARCH and GARCH parameters are significant. On the other hand, the Ljung–Box test
(Q test) indicated that there is no autocorrelation of the standardized residuals of the
squared residuals. Moreover, we can see for both models that there is a positive and
significant AR.
During the first sub-period, a high shareholders’ protection has a positive and significant
impact on the stock market returns (β12), while the stock market returns have a positive and
insignificant effect on the high shareholders’ protection (β21). This result is characterized by

Ljung–
Variables c AR1 α0 α1 β1 AIC(6) BIC(6) Box Pop

Shareholders’ protection “High”

Shareholder’s 0.00032 0.90207 0.1272* −0.0143* 1.00520* 1,817.4 1,840.50 2,529 0
protection (0.927) (0.000) (0.000) (0.000) (0.000)
SBF 120 0.1156 0.7141 473.83* 0.1208* 0.7621* 3,836.10 3,859.13 304 0
(0.097) (0.000) (0.003) (0.000) (0.000)
Exchange rate 0.5464 −0.9764 0.2086* −0.4196* 0.8922* 1,250.59 1,273.61 5.69 0
(0.000) (0.0000) (0.000) (0.000) (0.000)
Treasury Bill 0.7085 −0.3368 597.93* −0.8271* −0.1689* 2,679.31 2,702.34 2.221 0
(0.000) (0.000) (0.000) (0.000) (0.000)
Board size 0.02216 0.80378 0.0586* 56.681* 0.75636* 3,003.86 3,026.89 7,089 0
(0.000) (0.000) (0.000) (0.0000) (0.000)
Institutional 0.08737 0.79627 6052.5 0.3297*** 0.5689** 4,288.42 4,311.44 156,124 0
investors (0.762) (0.000) (0.132) (0.074) (0.045)
Shareholders’ protection “Low”
Shareholder’s −0.18588 −0.85824 5.085*** 0.881* 0.0293* 3,078.46 3,103.08 36,952 0
protection (0.857) (0.000) (0.013) (0.000) (0.000)
SBF 120 0.000322 0.902072 0.12722* 1.005207* −0.01433* 1,817.47 1,840.50 2,529 0
(0.927) (0.000) (0.000) (0.000) (0.000)
Exchange rate 0.38064 −0.99578 0.9634* −0.01074 −0.9886* 1,407.65 1,432.27 17.73 0
(0.005) (0.000) (0.000) (0.565) (0.000)
Treasury Bill −1.5010 −0.2484 612.116* −0.8835* −0.1235* 3,350.86 3,375.48 4.994 0
(0.000) (0.000) (0.000) (0.000) (0.000)
Table IV. Board size 0.001467 0.852989 2.05188* −0.0058* 0.99990* 3,929.26 3,953.88 3,346 0
Univariate GARCH (0.000) (0.000) (0.000) (0.000) (0.000)
effects with the Institutional −0.1156 0.7141 473.8 0.1208 0.7621 3,836 3,859.13 304 0
impact of corporate investors 0.097) (0.000) (0.003) (0.000) (0.000)
governance variables Notes: *,**,***Significant at the 1, 5 and 10 percent levels, respectively
 a unidirectional average transmission from the high shareholders’ protection to the Market risk
volatility of the stock market returns. As a consequence, these results are consistent with and corporate
those of Kho et al. (2009) who showed that US investors increase their equity holdings in governance
Korean companies when these companies improve their governance. On the other hand, we
can see a one-way transmission variance of volatility generated by the high shareholders’ in France
protection (γ12) and the volatility of the stock market returns. Furthermore, we can see that a
high shareholders’ protection has a negative and significant impact on the stock market
return volatility (γ12). This result, which implies that high shareholders’ protection can
stabilize the stock return volatility, is consistent with that of La Porta et al. (1997, 1998, 2002)
who found that countries that better protect their shareholders have a better corporate
governance, more developed capital markets, a greater capitalization of stock markets, an
introductory rate and a higher stock market. Their results suggested that firms in countries
with a strong shareholders’ protection have a higher stock return volatility and stability.
Additionally, Hale et al. (2012) found that the best protection of creditors is associated with a
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low volatility of the stock prices.

In the same context, the table shows that an exchange rate has a negative and
insignificant effect on the stock market returns (β13), while the stock return has a positive
and significant effect on the exchange rates (β31). This result shows that the stock return
volatility contributes to the depreciation of the exchange rates, which seems to be consistent
with the findings of Shin et al. (2014) who found that the exchange rate changes have a
positive effect on the S&P 500 index in the USA.
Moreover, no variance transmission between the exchange rates (γ13) and the stock market
return volatility (γ12). In Table IV, we can see that there is a negative relationship between the
Treasury Bill, the institutional investors, the board’s size and the stock returns; however, there
does not seem to be a statistically significant relationship between these variables. Moreover,
the stock returns have a significant effect on the Treasury Bill and the institutional investor.
On the other hand, a bidirectional variance transmission was detected between the Treasury
Bill, the institutional investor, the board’s size and the stock return volatility.
Regarding Panel “B,” in Table V, the result indicates that a low shareholders’ protection
(β12), exchange rate (β13), Treasury Bill (β14) and the board’s size (β16) have no significant
impact on the stock returns. This result indicates that, on average, no transmission was
detected between the exchange rates, the Treasury Bill, the board’s size and the stock return
volatility. Furthermore, institutional investors have a negative and significant effect on the
stock market returns, which minimizes the stock returns. On the other hand, the stock
market returns (β21) have a negative but insignificant effect on the low shareholders’
protection. This result is in conformity with that of Core et al. (2006) who showed that a low
investors’ protection is negatively correlated with the stock returns, whereas the Treasury
Bill (β14, β14) has a negative impact on the stock return volatility.
Table V also shows some spillover effects. Let us focus first on the coefficients γ12, γ13,
γ14, γ15 and γ16, which correspond, respectively, to the shareholders’ protection, the exchange
rates, the Treasury Bill, the institutional investors and the board’s size in the conditional
variance equation. In this context, we can estimate that the exchange rates, the Treasury Bill
and the board’s size (γ13, γ14 and γ16) have no significant effect on the stock return volatility.
Moreover, the institutional investors and the low shareholders’ protection have a positive
and significant effect on the volatility of the stock market returns, which implies that they
contribute to the increase of the stock market return volatility. This also confirms the one
mentioned by Levin et al. (2002) who found that countries that heavily rely on internal rather
than on external funding often have a low level of property right protection. This is
particularly relevant for common assessment parameters, such as the market value
and capitalization. However, once the crisis begins and the expected returns decrease
significantly, the investors believe that corporate governance is weak especially in countries
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IJMF

Table V.

(pre-crisis)
shareholders
The impact of

during subprime
on the stock market
protection, exchange

crisis: GARCH–BEKK
rate and Treasury Bill
Panel A Panel B
Variables HSP* Exchange rate Treasury Bill IINS NV Board size LSP* Exchange rate Treasury Bill IINS NV Board size

Equation in mean
β12 0.2627** −0.7249
β21 0.0021 −0.002
β13 −0.4374 −0.0006
β31 0.6079* 0.5627
β14 −0.1051 −0.0542
β41 −0.0190* −0.2792***
β15 −0.1677 −0.8586***
β51 0.0194** 0.0024
β16 −0.5366 −0.0232
β61 −0.0173 0.0038
Equation in variance
γ12 −0.8049** 4.187*
γ21 −0.0027 −0.006***
γ13 −0.0915 −0.007
γ31 −0.0165 3.2243*
γ14 −1.0176*** −0.1637
γ41 −0.0024** −0.1182*
γ15 −2.7400*** 3.558*
γ51 −0.0149** 0.0042
γ16 1.3646** 0.0409
γ61 0.0017* −0.0319*
Log-likelihood ratio test 2,545.787 2,922.969
Notes: HSP, high shareholder’s protection; LSP, low shareholder’s protection; IINS NV, institutional investors. *,**,***Significant at the 1, 5 and 10 percent levels,
respectively
 where the rights of minority shareholders are not protected (Mitton, 2002). Furthermore, Market risk
Leuz et al. (2010) showed that US investors avoid investing in foreign companies when the and corporate
investors’ protection seems to be a problem. governance
The sovereign crisis period is characterized by the high shareholders’ protection, the
exchange rates, the Treasury Bill and the board’s size which have a significant impact on in France
the stock return volatility in the conditional mean equation. Concerning the conditional
variance equation, we can see that a high shareholders’ protection, the Treasury Bill,
institutional investors and the board’s size have a significant and negative impact on the
stock return volatility. On the other hand, Table VI also indicates that the low shareholders’
protection (β12), the exchange rate (β13), the Treasury Bill (β14) and the board’s size (β16)
have a significant impact on the volatility stock returns in the conditional mean equation;
besides, we can see that the relationship between these variables is unidirectional.
In addition, the conditional variance equation showed that the low shareholders’
protection, the exchange rates and the Treasury Bill (γ13, γ14 and γ16) have a significant and
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negative effect on the sock return volatility. This result confirms that of Kho et al. (2009)
which showed that US investors increase their equity holdings in Korean companies when
these companies improve their governance.
The post-crisis period is summarized by the unidirectional relationship in mean equation
between the institutional investors, the board’s size and the stock return volatility. In
addition, this result indicates that the institutional investor and the board’s size have a
positive and significant impact on the stock return volatility. In contrast, the table indicates
in variance equation that the high protection and the board’s size (γ12 and γ16) have a
negative and significant effect on the volatility of the stock returns. This result indicates
that the high protection and the board’s size (γ12 and γ16) minimize the stock return volatility.
Moreover, Table VII indicates that in the average and the variance equation, the exchange
rate and the Treasury Bill have a negative and significant effect on the stock return volatility.
This result confirms that of Koulakiotis et al. (2013) who pointed out that the exchange rates
and the Treasury Bill have a significant effect on the stock return volatility.

6. Conclusion
To conclude, we can say that the relationship between the shareholders’ protection and the
stock returns is an important subject which draws the attention of many different
stakeholders in financial markets. The result of the development of the stock market due to
globalization showed that there is an increasing presence of foreign institutional investors
participating in stock markets. Moreover, the shareholders’ protection is a necessary
measure mainly to maintain the sustainable development of the stock market. Therefore,
we have highlighted the relationship between corporate governance, the exchange rates, the
Treasury Bill, the shareholders’ protection and the stock return volatility. Moreover,
we presented an empirical part that explains the effect of corporate governance, the
exchange rates, the Treasury Bill and the shareholders’ protection on the stock return
volatility. Our empirical analysis focuses on a sample of 99 French firms over the 2006/2015
period. The results showed that, first, a high shareholders’ protection has a negative and
significant impact on the stock market return volatility as it can stabilize the stock return
volatility. Second, we can see that a low shareholders’ protection has a positive and
significant effect on the stock market return volatility. This result implies that a lower
shareholders’ protection increases the stock return volatility. However, we can estimate that
a low shareholders’ protection has a negative and significant effect on the stock market
returns. Moreover, a low shareholders’ protection has been singled out as the leading cause
of the market returns and the exchange rate volatility, while a high protection of
shareholders increases the stock market returns. In the same vein, Leuz et al. (2010) provided
evidence that US investors avoid investing in foreign companies when the investors’
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IJMF

Table VI.

Shareholders

(during crisis)
The Impact of

on the stock market

protection, exchange

crisis: GARCH–BEKK
during sovereign debt
rate and Treasury Bill
Panel A Panel B
Variables HSP* Exchange rate Treasury Bill IINS NV Board size LSP* Exchange rate Treasury Bill IINS NV Board size

Equation in mean
β12 −2.004* 0.686**
β21 −0.004* 0.0015
β13 0.0083* 0.0061***
β31 −0.2329* −0.1532
β14 0.7634** 0.0361***
β41 0.5863* −0.0143
β15 0.6273 0.1187
β51 −0.000* −0.0028
β16 0.2558* −0.275**
β61 0.007*** 0.0090
Equation in variance
γ12 −1.0173* −0.1550*
γ21 0.0147 −0.0176*
γ13 0.0081 −0.0056***
γ31 0.18001 0.2017
γ14 −2.531* −0.5786**
γ41 −0.0056** −0.021***
γ15 −18.420* 0.40805
γ51 0.000* −0.047*
γ16 −1.348* 0.2560
γ61 −0.043* −0.0104
Log-likelihood ratio test 2,545.787 2,922.969
Notes: HSP, high shareholder’s protection; LSP, low shareholder’s protection; IINS NV, institutional investors. *,**,***Significant at the 1, 5 and 10 percent levels,
respectively
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Panel A Panel B
Variables HSP* Exchange rate Treasury Bill IINS NV Board size LSP* Exchange rate Treasury Bill IINS NV Board size

Equation in mean
β12 0.0779 −1.518
β21 0.0003 −0.001
β13 0.0022 0.0324***
β31 −0.1214 −1.5031*
β14 −0.1134 −0.273***
β41 −0.0111 −0.0842*
β15 0.1237*** −0.7537
β51 −0.003 −0.1559***
β16 0.002*** −0.2811
β61 −0.0373 0.0135
Equation in variance
γ12 −0.7632*** 0.0340
γ21 0.0004 0.00485
γ13 −0.0249* −0.0400*
γ31 −3.7991* 0.4409*
γ14 −3.4067 0.7802*
γ41 −0.0846* 0.1112*
γ15 0.2146 −0.6451
γ51 0.0147 0.0103***
γ16 −0.260*** −0.0505
γ61 −0.0511** 0.0581*
Log-likelihood ratio test 2,545.787 2,922.969
Notes: HSP, high shareholder’s protection; LSP, low shareholder’s protection; IINS NV, Institutional investors. *,**,***Significance at the 1, 5 and 10 percent levels,
respectively
governance
and corporate

in France

The impact of
Market risk

(post-crisis)
on the stock market:
rate and Treasury Bill
shareholders
Table VII.

protection, exchange

GARCH–BEKK
 IJMF protection seems to be the problem. Moreover, Kho et al. (2009) showed that US investors
increase their equity holdings in Korean companies that have a developed governance to
improve their governance. In fact, this study is critical for all the institutional investors as
the results suggest that investors should follow the shareholders’ protection in all the
countries to make decisions about their investments since the high shareholders’ protection
increases the firm’s stock returns and decreases the stock return volatility.

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bear markets”, The Journal of Behavioral Finance, Vol. 8 No. 3, pp. 138-153.
 La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2008), “The economic consequences of legal origins”, Market risk
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in cross-border mergers and acquisitions”, 27th Australasian Finance and Banking Conference,
governance
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Markets, Vol. 10 No. 3, pp. 219-248.
Shleifer, A. and Wolfenzon, D. (2002), “Investor protection and equity markets”, Journal of Financial
Economics, Vol. 66 No. 1, pp. 3-27.
Wang, T. and Hsu, C. (2013), “Board composition and operational risk events of financial institutions”,
Journal of Banking & Finance, Vol. 37 No. 6, pp. 2042-2051.

Corresponding author
Mouna Aloui can be contacted at: mounafba@yahoo.fr
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