The Characteristics of Firms that Hire Chief Risk Officers

Abstract

Enterprise risk management (ERM) is a management approach that holistically manages risks across the organization. In this paper we examine the characteristics of firms that adopt ERM. Our results support the hypothesis that firms adopt ERM for direct economic benefit rather than to merely comply with regulatory pressure. Using the hiring of a CRO as a proxy for ERM adoption, we find that firms that are larger, have more volatile operating cash flows, and greater institutional ownership are more likely to initiate an ERM program. In addition, when the CEO has incentives to take risk (through compensation), the firm is also more likely to hire a CRO. Finally, banks with lower levels of Tier 1 capital are also more likely to hire a CRO.

Keywords: Enterprise Risk Management

JEL Classification: G20, J33