FOREIGN OWNERS’ PSYCHIC DISTANCE AND CORPORATE RISK-TAKING IN EMERGING MARKET FIRMS
DOI:
https://doi.org/10.33736/ijbs.12824.2026Keywords:
Foreign ownership, Psychic distance, Risk-taking behaviorAbstract
This study aims to investigate the relationship between certain attributes of the psychic distance (i.e., cultural, geographical, linguistic, political, economic, and governance quality distance) through two principal components (competitiveness and location distance) between the foreign owner’s home country and host country, with a firm’s risk-taking behavior. By using fixed-effect panel regression on a data set of 251 Indonesian non-financial listed firms over 2010-2019 period, includes foreign investors from 25 countries, and by employing sub-sampling regressions based on environmental and social risks according to the ESG Risk Atlas, this study finds that competitiveness distance between a foreign owner's home country and the host country negatively affects a firm's risk-taking behavior. This result remains robust, particularly for firms clustered within the high social risk group. We recommend that the Indonesian government prioritize promoting investment opportunities to foreign institutional investors from countries with a smaller competitiveness distance. Thus, Indonesian firms' risk-taking behavior will increase, signifying a willingness to pursue new investment projects that ultimately contribute to economic growth. This study extends prior research in international distance and agency theories by demonstrating the importance of incorporating foreign owners’ competitiveness distance to reduce agency conflicts between foreign investors and a firm’s managers, thereby increasing the firm's risk-taking behavior.
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