Enterprise Risk Management and the Cost of Capital
43 Pages Posted: 20 Feb 2018
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Enterprise Risk Management and the Cost of Capital
Enterprise Risk Management and the Cost of Capital
Date Written: March 2018
Abstract
Enterprise risk management (ERM) is a process that manages all risks in an integrated, holistic fashion by controlling and coordinating any offsetting risks across the enterprise. This research investigates whether the adoption of the ERM approach affects firms' cost of equity capital. We restrict our analysis to the U.S. insurance industry to control for unobservable differences in business models and risk exposures across industries. We simultaneously model firms' adoption of ERM and the effect of ERM on the cost of capital. We find that ERM adoption significantly reduces firm's cost of capital. Our results suggest that cost of capital benefits are one answer to the question how ERM can create value.
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Enterprise Risk Management and the Cost of Capital
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