Spatial Distance and Risk Category Effects in Enterprise Risk Management Practice

Abstract

Research suggests corporate board members would like to receive more information about how risk probabilities are estimated. We examine how spatial distance from a risk assessment target and risk category (operational vs. non-operational risk factors) affects decision-makers’ assessment of the probability that a given risk will materialize. Results from an experiment involving 141 risk managers provide some support for spatial distance effects. Importantly, we find the difference in decision-makers’ probability assessments between operational and non-operational risk factors is greater when assessing a proximate rather than a remote target. We contribute to the accounting literature by demonstrating how spatial distance affects probability judgments. This is important as probability judgments are not only prevalent in managerial decision-making contexts but also in audit, tax, and other settings where decision-targets may be spatially removed from the decision-maker.

Keywords: enterprise risk management (ERM), probability assessment, risk category, risk disclosure, risk register, risk database

JEL Classification: M41, M42