Enterprise Risk Management as a Dynamic Capability: A Test of Its Effectiveness During a Crisis

Abstract

The dynamic capabilities framework has emerged as a growing area of research within business disciplines — the framework seeks to explain how and why firms adapt successfully to changes in their environments. Yet, whether such capabilities are effective in periods of environmental changes that can be characterized as a crisis remains an unexplored area of research. This paper adopts the position that enterprise risk management (ERM) constitutes a dynamic capability, and examines whether a firm’s ERM capability allowed it to respond effectively to the financial crisis of 2008. We find that superior ERM capability was associated with lower decline in stock price during the downturn and superior profitability during the upturn. The results suggest that firms may need different types of dynamic capabilities to react and respond to different dimensions of environment and type of change.

Keywords: enterprise risk management, dynamic capabilities