The Value of Enterprise Risk Management

Journal of Risk and Insurance, Forthcoming

42 Pages Posted: 30 Jul 2009 Last revised: 20 Nov 2010

See all articles by Robert E. Hoyt

Robert E. Hoyt

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

Andre P. Liebenberg

University of Mississippi

Date Written: July 13, 2010

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.

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

JEL Classification: G22, G32.

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: https://ssrn.com/abstract=1440947

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 ( email )

PO Box 3986
Oxford, MS 38677
United States

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