The Relationship between Chief Risk Officers and Firm Value: Its Complicated
53 Pages Posted: 20 Apr 2019 Last revised: 5 Mar 2021
Date Written: March 20, 2020
We study the relationship between enterprise risk management and firm value. We analyze how the influence, reporting, and compensation incentives of the chief risk officer (CRO) contribute to firm value. We use data from U.S. publicly traded insurers between 2009 and 2017 and find that the existence of a CRO alone is insufficient for value creation in insurers. Our results suggest a negative relationship between a CRO and firm value. However, we find empirical evidence of a positive relationship between firm value and including the CRO in the compensation committee of the board and providing the CRO with an equity-based compensation plan. Moreover, we propose two scores meant to isolate the participation of the CRO from other ERM proxies on value creation. Using these scores, we confirm a negative relationship between CRO and firm value and a positive relationship between firm value and the utilization of the CRO.
Keywords: Enterprise risk management; Chief risk officer; Compensation; Firm value; Insurance industry
JEL Classification: G22; G32
Suggested Citation: Suggested Citation