Abstract

http://ssrn.com/abstract=1440947
 
 

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The Value of Enterprise Risk Management


Robert E. Hoyt


University of Georgia - C. Herman and Mary Virginia Terry College of Business

Andre P. Liebenberg


University of Mississippi - School of Business Administration

July 13, 2010

Journal of Risk and Insurance, Forthcoming

Abstract:     
Enterprise risk management (ERM) has been the topic of increased media attention in recent years. Many organizations have implemented ERM programs, consulting firms have established specialized ERM units, and universities have developed ERM-related courses and research centers. Despite the heightened interest in ERM by academics and practitioners, there is an absence of empirical evidence regarding the impact of such programs on firm value. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We use a maximum-likelihood treatment effects framework to simultaneously model the determinants of ERM and the effect of ERM on firm value. In our ERM-choice equation we find ERM usage to be positively related to factors such as firm size and institutional ownership, and negatively related to reinsurance use, leverage, and asset opacity. By focusing on publicly-traded insurers we are able to estimate the effect of ERM on Tobin’s Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium of roughly 20% is statistically and economically significant and is robust to a range of alternative specifications of both the ERM and value equations.

Number of Pages in PDF File: 42

Keywords: Enterprise risk management, firm value, selection bias, insurance companies.

JEL Classification: G22, G32.

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Date posted: July 30, 2009 ; Last revised: November 20, 2010

Suggested Citation

Hoyt, Robert E. and Liebenberg, Andre P., The Value of Enterprise Risk Management (July 13, 2010). Journal of Risk and Insurance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1440947

Contact Information

Robert E. Hoyt (Contact Author)
University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )
Athens, GA 30602-6255
United States
706-542-4290 (Phone)
706-542-4295 (Fax)
Andre P. Liebenberg
University of Mississippi - School of Business Administration ( email )
PO Box 3986
Oxford, MS 38677
United States
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