Risky Business: Does ERM Increase Firm Value?
As JPMorgan CEO Jamie Dimon came under fire for the bank’s $2 billion trading loss, the critical issue of risk management again came to the forefront of business dialogue.
Against the backdrop of the global financial crisis, a study in the Journal of Accounting, Auditing & Finance (JAAF) looks at enterprise risk management (ERM), a rising but little-researched paradigm in global financial institutions–as well as in the government–to evaluate its effectiveness.
Michael K. McShane, Anil Nair, and Elzotbek Rustambekov, all of Old Dominion University, published “Does Enterprise Risk Management Increase Firm Value?” in the October 2011 issue of JAAF. Click here to view more articles in this issue.
The authors explain in the abstract:
Enterprise risk management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its effectiveness. The scant research on the relationship between ERM and firm performance has offered mixed findings and has been limited by the lack of a suitable proxy for the degree of ERM implementation. Using Standard and Poor’s newly available risk management rating, the authors find evidence of a positive relationship between increasing levels of TRM capability and firm value but no additional increase in value for firms achieving a higher ERM rating. Considering these results, the authors suggest directions for future research.
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