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ABSTRACT
Enterprise risk management (ERM) has been the topic of increased media attention in recent years. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We simultaneously model the determinants of ERM and the effect of ERM on firm value. We estimate the effect of ERM on Tobin's Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium of roughly 20 percent is statistically and economically significant.
INTRODUCTION
Interest in enterprise risk management (ERM) has continued to grow in recent years. Increasing numbers of organizations have implemented or are considering ERM programs, consulting firms have established specialized ERM units, rating agencies have begun to consider ERM in the ratings process,2 and universities have developed ERM-related courses and research centers. Unlike traditional risk management where individual risk categories are separately managed in risk "silos," ERM enables firms to manage a wide array of risks in an integrated, enterprise-wide fashion. Academics and industry commentators argue that ERM benefits firms by decreasing earnings and stock price volatility, reducing external capital costs, increasing capital efficiency, and creating synergies between different risk management activities (Miccolis and Shah, 2000; Gumming and Hirtle, 2001; Lam, 2001; Meulbroek, 2002; Beasley, Pagach, and Warr, 2008). More broadly, ERM is said to promote increased risk awareness that facilitates better operational and strategic decision making. Despite the substantial interest in ERM by academics and practitioners and the abundance of survey evidence on the prevalence and characteristics of ERM programs (see, e.g., Miccolis and Shah, 2000; Hoyt, Merkley, and Thiessen, 2001; CFO Research Services, 2002; Klefmer, Lee, and McGannon, 2003; Liebenberg and Hoyt, 2003; Beasley, Clune, and Hermanson, 2005), there is an absence of empirical evidence regarding the impact of such programs on firm valued The absence of clear empirical evidence on the value of ERM programs continues to limit the growth of these programs. According to one industry consultant, Sim Segal of Deloitte Consulting, corporate executives...