The Relation between Risk Management and Earnings Volatility among Profit and Loss Firms

• In Event: Financial Accounting and Reporting III

Abstract

This paper investigates the benefits firms receive for implementing risk management activities. Using a first differenced design this study investigates whether changes in the quality of risk management are associated with changes in earnings volatility. Our findings are consistent with firms achieving lower earnings volatility by implementing higher quality risk management systems. Our results are robust across profit and loss firms, although the economic impact of increases in risk management quality are not as large for profit firms. Overall, we provide support to extant literature in the risk management domain by documenting an implicit assumption in studies which use market based measures of firm performance (e.g., Beasley et al. 2008; Hoyt and Liebenberg 2009; Gordon et al. 2009; Baxter et al. 2012). By showing a change in earnings volatility, a key input into valuation models, we provide evidence as to how companies accomplish market performance.

Authors

• Ryan Don Leece, University of Wisconsin–Milwaukee

• Chris Edmonds, University of Delaware

• Jennifer Echols Edmonds, Saint Joseph University - Bala Cynwyd