Empirical Analysis of Joint Impact of Enterprise Risk Management and Corporate Governance on Firm Value



Published Apr 8, 2018
Ananth Rao, Prof


This paper analyzes simultaneity and endogeneity of ERM and Corporate Governance. It assesses quantitative relationship between Corporate Governance, ERM and value of the firm. The research results provide quantitative justifications for the boards to make investments in ERM and Corporate Governance initiatives for improved shareholder wealth.  3SLS-IV system modelling was applied on 2004-11 data of Gulf Cooperation Council financial institutions. Our research confirms the simultaneity and endogeneity of Corporate Governance, ERM and Firm Value determinants. Firm value is jointly and positively impacted by ERM & Corporate Governance initiatives although the impact was less significant. Unexpectedly, ERM initiative was significantly and negatively impacted by determinants such as intangibility, and profitability. Firm size was the only determinant that showed significant and positive impact on firm value. Relative to UAE the corporate governance mechanism was active in Bahrain, Saudi Arabia, Kuwait and Oman firms. Further, the existence of audit committees in the GCC firm’s boards and ERM adoption significantly positively impacted the corporate governance by 3.42% and 1.7239% respectively.

Keywords: Corporate Governance, Enterprise Risk Management, Firm Value, Simultaneity, Endogeneity, Gulf Cooperation Council (GCC) economies.

JEL codes: C15, C21, C51, D57, F30, G21, G32, G34, K22, L21, M31, M41, N25, O16

How to Cite

Rao, A. (2018). Empirical Analysis of Joint Impact of Enterprise Risk Management and Corporate Governance on Firm Value. International Review of Advances in Business, Management and Law, 1(1), 34–50. https://doi.org/10.30585/irabml.v1i1.66


Download data is not yet available.
Abstract 1759 | PDF Downloads 1370



Corporate Governance, Enterprise Risk Management, Firm Value, Simultaneity, Endogeneity, Gulf Cooperation Council (GCC) economies



Allayannis, G., and J. Weston (2001). The Use of Foreign Currency Derivatives and Firm Market Value. Review of Financial Studies, 14: 243-276.

A.M. Best, 2006, A.M. Best Comments on Enterprise Risk Management and Capital Models, World Wide Web: http://www.ambest.com/ratings/ methodology/enterpriserisk.pdf.

Beasley, M. S., R. Clune, and D. R. Hermanson, 2005, Enterprise Risk Management: An Empirical Analysis of Factors Associated with the Extent of Implementation, Journal of Accounting and Public Policy, 24: 521-531

Beasley, M. S., D. Pagach, and R. Warr, 2008, The Information Conveyed in Hiring Announcements of Senior Executives Overseeing Enterprise-Wide Risk Management Processes, Journal of Accounting, Auditing, and Finance, 23: 311-332.

Berger, P. G., and E. Ofek, 1995, Diversification's Effect on Firm Value, Journal of Financial Economics 37: 39-65.

Boatright, J.R. (2011). Risk Management and the Responsible Corporation: How Sweeping the Invisible hand? Business and Society Review, 116 (1): 145-170.

Boone, A., Field, L., Karpoff, J., Raheja, C. G., 2007. The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics 85, 66–101.

Colquitt, L. L., R. E. Hoyt, and R. B. Lee, 1999, Integrated Risk Management and the Role of the Risk Manager, Risk Management and Insurance Review, 2: 43-61.

Committee of the Sponsoring Organizations of the Treadway Commission (2004). Enterprise Risk Management, Integrated Framework (COSO-ERM Report). New York: AICPA.

Cummins, J. D., C. Lewis, and R. Wei, 2006, The Market Impact of Operational Risk Events for U.S. Banks and Insurers, Journal of Banking and Finance, 30: 2605-2634.

Easterbrook, F. H., 1984, Two Agency-Cost Explanations of Dividends, American Economic Review, 74: 650-659.

Fama, E. F., Jensen, M. C., 1983. Separation of ownership and control. Journal of Law and Economics 26, 301–326.

Guay, W. and S. P. Kothari, 2003, How Much Do Firms Hedge With Derivatives?, Journal of Financial Economics, 70: 423-461.

Gumming, C. M., and B. J. Hirtle, 2001, The Challenges of Risk Management in Diversified Financial Companies, FRBNY Economic Policy Review, 7: 1-17.

Harris, M., Raviv, A., 2008. A theory of board control and size. Review of Financial Studies 21, 1797–1832.

He, E., D.W. Sommer and X. Xie, 2011, The Impact of CEO Turnover on Proerty/Liability Insurer Performance, Journal of Risk and Insurance, 78(3):583-608.

Hermalin, B. E., Weisbach, M. S., 1998. Endogenously chosen boards of directors. American Economic Review 88, 96–118.

Hoyt, R. E., B. M. Merkley, and K. Thiessen, 2001, A Composite Sketch of a Chief Risk Officer, The Conference Board of Canada, Toronto, September.

Jensen, M. C., 1986, Agency Costs of Free Cash Flow, Corporate Finance and Takeover, American Economic Review, 76: 323-329.

Kleffner, A., R. Lee, & McGannon, B. (2003). The effect of corporate governance on the use of enterprise risk management: Evidence from Canada. Risk Management and Insurance Review 6 (1): 53-73.

Lam, J. (2001). The CRO is here to stay. Risk Management, 48 (4) (April), 16-22

Lang, L. and R. Stulz, 1994, Tobin's Q, Diversification, and Firm Performance, Journal of Political Economy, 102: 1248-1280.

Lewellen, W. G., 1971, A Pure Financial Rationale for the Conglomerate Merger, Journal of Finance, 26: 521-537.

Liebenberg, A. & Hoyt, R. (2003). The determinants of enterprise risk management: evidence from the appointment of chief risk officers, Risk Management and Insurance Review 6 (2003) (1), pp. 37–52.

Lindenberg, E. and S. Ross, 1981, Tobin's Q Ratio and Industrial Organization, Journal of Business, 54: 1-32.

Lehn, K., Patro, S., Zhao, M., 2009. Determinants of the size and composition of corporate boards: 1935– 2000. Financial Management 38, 747–780.

Linck, J. S., Netter, J. M., Yang, T., 2008. The determinants of board structure. Journal of Financial Eco nomics 87, 308–328.

Meulbroek, L. K., 2002, Integrated Risk Management for the Firm: A Senior Manager's Guide, Journal of Applied Corporate Finance, 14: 56-70.

Miccolis, J., and S. Shah, 2000, Enterprise Risk Management: An Analytic Approach, Tillinghast-Towers Perrin Monograph (New York).

Niamh M. Brennan and Jill Solomon (2008). Accounting, Auditing & Accountability Journal (2008), Corporate Governance, accountability and mechanisms of accountability: an overviewVolume 21, No.7, pp 885-906,

Nocco, B. W. & Schulz, R. (2006). Enterprise risk management: Theory and practice. Journal of Applied Corporate Finance, 18(4) , pp. 8-20(13)

Pagach, D. P. & Warr, R. S. (2007). An Empirical Investigation of the Characteristics of Firms Adopting Enterprise Risk Management. Working paper, Available at SSRN: http://ssrn.com/abstract=1010200

Pagach, D., and R. Warr, 2010, The Effects of Enterprise Risk Management on Firm Performance. World Wide Web: http://ssrn.com/abstract=1155218 (accessed April 10, 2010).

Pohle, G. and Hittner, J. 2008. Attaining Sustainable Growth Through CSR, IBM Institute for Business Value.

Potter, S.W., and Sommer, D.W. (2006), Opaqueness in the Insurance Industry: Why are Some Insurers Harder to Evaluate Than Others? Risk Management and Insurance Review, 9:149-163

PricewaterhouseCoopers (2008): Does ERM matter? ERM for the Insurance Industry: http://www.pwc.com/en_GX/gx/insurance/pdf/erm_highlights.pdf

PricewaterhouseCoopers (2010): CTC Guide to ERM Beyond Theory: Practitoner Perspectives on ERM. http://www.pwc.com/us/en/risk-management/assets/beyond-theory.pdf

Raheja, C. G., 2005. Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis 40, 283–306.

Sim Segal (2011) Corporate Value of Enterprise Risk Management: The Next Step in Business Management (Wiley Corporate F&A); ISBN-13: 978-0470882542

Smithson, C. and B. J. Simkins, 2005, Does Risk Management Add Value? A Survey of the Evidence, Journal of Applied Corporate Finance, 17: 8-17.

Standard & Poor's, 2005, Insurance Criteria: Evaluating The Enterprise Risk Management Practices of Insurance Companies, October 17.

Teece, D. J., 1980, Economies of Scope and the Scope of the Enterprise, Journal of Economic Behavior and Organization, 1: 223-247.

Yermack, D., 1996. Higher market valuation of companies with a small BOD. Journal of Financial Economics 40, 185–211.

Yilmaz, A.K., and Flouris, T. 2010. Managing Corporate sustainability: Risk Management Process Based Perspective. African Journal of business Management. 4(2):162-171.