"Playing Offense" through Enterprise Risk Management: Evidence from Mergers and Acquisitions

Abstract

Although theory posits that the ultimate function of enterprise risk management (ERM) is to help firms make the most of their strategic decisions, the literature has focused on whether and how ERM enhances firm value through the traditional risk-management channels (minimizing downside risks or "playing defense"). Evidence is scant on whether and how ERM delivers value by enabling firms to realize the upside potential of strategic decisions ("playing offense"). Importantly, less than 20% of companies perceive strategic value from investing in ERM. We use a unique measure of ERM quality that explicitly evaluates firms' use of ERM in strategic decision-making and find that ERM quality is negatively associated with the likelihood and frequency of mergers and acquisitions (M&As). Further, when high-quality ERM firms pursue M&As, they are more likely to complete the transaction and enjoy better post-merger performance. Our results support the argument that superior ERM technology empowers firms to leverage the benefits of strategic decision-making, offering important implications for policymakers and executives.

Keywords: Enterprise risk management, Risk management, Mergers and Acquisitions, Strategic value

JEL Classification: G22, G32, G34