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http://ssrn.com/abstract=1684807
 
 

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Enterprise Risk Management Program Quality: Determinants, Value Relevance, and the Financial Crisis


Ryan J. Baxter


Boise State University, College of Business and Economics, Department of Accountancy

Jean C. Bedard


Bentley University - Department of Accountancy

Rani Hoitash


Bentley University - Department of Accountancy

Ari Yezegel


Bentley University - Department of Accountancy

July 31, 2012

Contemporary Accounting Research, Forthcoming

Abstract:     
This paper investigates factors associated with high quality Enterprise Risk Management (ERM) programs in financial services firms, and whether ERM quality enhances performance and signals credibility to the financial markets. ERM, developed with the assistance of the accounting profession, provides a framework and plan to integrate management of all sources of risk. Challenged by measurement difficulties common to research on management control systems, prior ERM studies present mixed findings. Using ERM quality (ERMQ) ratings of financial companies by Standard & Poor’s, we find that higher ERMQ is associated with greater complexity, less resource constraint, and better corporate governance. Controlling for such characteristics, we find that higher ERMQ is associated with improved accounting performance. Results show a market reaction to signals of enhanced management control from initial ERMQ ratings and rating revisions, and a stronger response to earnings surprises for firms with higher ERMQ. Focusing on the recent global financial crisis, our analysis suggests that there is no relation between ERM quality and market performance prior to and during the market collapse. However, returns of higher ERMQ companies are higher during the market rebound. Overall, results reveal that firm performance and value are enhanced by high quality controls that integrate risk management efforts across the firm, enabling better oversight of managers’ risk-taking behavior, and aligning that behavior with the strategic direction of the company.

Number of Pages in PDF File: 48

Keywords: Enterprise Risk Management,Firm value, Earnings Response Coefficient, Global financial crisis

JEL Classification: G32; G21; G22; M41; M42

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Date posted: September 30, 2010 ; Last revised: August 1, 2012

Suggested Citation

Baxter, Ryan J. and Bedard, Jean C. and Hoitash, Rani and Yezegel, Ari, Enterprise Risk Management Program Quality: Determinants, Value Relevance, and the Financial Crisis (July 31, 2012). Contemporary Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1684807 or http://dx.doi.org/10.2139/ssrn.1684807

Contact Information

Ryan J. Baxter
Boise State University, College of Business and Economics, Department of Accountancy ( email )
Boise, ID 83725
United States
Jean C. Bedard
Bentley University - Department of Accountancy ( email )
175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)
Rani Hoitash (Contact Author)
Bentley University - Department of Accountancy ( email )
175 Forest Street
Waltham, MA 02452-4705
United States
Ari Yezegel
Bentley University - Department of Accountancy ( email )
175 Forest Street
Waltham, MA 02452
United States
+1.781.891.2264 (Phone)
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