Managerial Career Concerns and Enterprise Risk Management Adoption

44 Pages Posted: 27 Nov 2018

See all articles by Muhammed Altuntas

Muhammed Altuntas

University of Cologne - Department of Risk Management and Insurance

Thomas Berry-Stölzle

University of Iowa - Department of Finance

Robert E. Hoyt

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

Date Written: October 2018

Abstract

Enterprise Risk Management (ERM) is the approach of managing all risks faced by a firm in an integrated, holistic fashion. This research analyzes factors that influence a firm’s decision to start an ERM program. We argue that top management’s decision to adopt ERM is influenced by managerial career concerns about keeping their jobs. ERM adoption reduces the volatility of a firm’s earnings and, hence, improves the informativeness of earnings as a signal of the manager’s ability. The career concerns view predicts that a manager with a high initial reputation should only adopt ERM after a period of poor performance. Consistent with this prediction, we find that negative changes in past firm performance increase a firm’s probability to adopt ERM and are accompanied by significant improvements in the quality of a firm’s risk management process.

Keywords: Enterprise risk management, hedging, career concerns

JEL Classification: C33, G22, G32, M12

Suggested Citation

Altuntas, Muhammed and Berry-Stölzle, Thomas and Hoyt, Robert E., Managerial Career Concerns and Enterprise Risk Management Adoption (October 2018). Available at SSRN: https://ssrn.com/abstract=3277180 or http://dx.doi.org/10.2139/ssrn.3277180

Muhammed Altuntas

University of Cologne - Department of Risk Management and Insurance ( email )

Kerpener Str. 30
Cologne, D-50923
Germany

Thomas Berry-Stölzle (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Robert E. Hoyt

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)

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