The Effects of Enterprise Risk Management on Firm Performance

Abstract

We study the effect of adoption of enterprise risk management (ERM) principles on firms' long-term performance by examining how financial, asset and market characteristics change around the time of ERM adoption. Using a sample of 106 firms that announce the hiring of a Chief Risk Officer (an event frequently accompanied by adoption of Enterprise Risk Management) we find that firms adopting ERM experience a reduction in stock price volatility. We also find that firms hiring Chief Risk Officers (CRO) when compared to similar, non-CRO appointing firms in their industry group, exhibit increased asset opacity, a decreased market to book ratio and decreased earnings volatility. In addition, we find a negative relationship between the change in firms' market to book ratio and earnings volatility. We also find banks increase leverage after ERM adoption. Overall, our results fail to find support for the proposition that ERM is value creating, although further study is called for.

Keywords: enterprise risk management

JEL Classification: G12, G32, G34, M40, M49