The Effects of Enterprise Risk Management on Firm Performance

28 Pages Posted: 6 Jul 2008 Last revised: 16 Apr 2010

Donald P. Pagach

North Carolina State University

Richard S. Warr

North Carolina State University

Date Written: April 10, 2010

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

Suggested Citation

Pagach, Donald P. and Warr, Richard S., The Effects of Enterprise Risk Management on Firm Performance (April 10, 2010). Available at SSRN: https://ssrn.com/abstract=1155218 or http://dx.doi.org/10.2139/ssrn.1155218

Donald P. Pagach (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States
919-515-4447 (Phone)
919-515-4446 (Fax)

Richard S. Warr

North Carolina State University ( email )

BOX 7229
Raleigh, NC 27695-7229
United States
919-513-4646 (Phone)
919-515-6943 (Fax)

HOME PAGE: http://www4.ncsu.edu/~rswarr/

Paper statistics

Downloads
5,184
Rank
1,022
Abstract Views
14,977