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Enterprise Risk Management and Firm Reputation

Sat, April 6, 9:05 to 10:45am, Hyatt Regency Savannah, TBA

Abstract

Enterprise risk management is a growing practice and continues to be researched more and more as a determinant of value and significance. Corporate Board members, in addition to managers, face increased pressure to better manage their risks, and reputation risk is widely perceived to be one of the biggest corporate risks. Yet, few empirical studies have linked the effectiveness of board oversight and other enterprise risk management features to reputation and the generation of corporate income and firm value. A 2010 Securities Exchange Commission rule raises the bar for Board and Management enterprise risk management by requiring that firms discuss specific aspects of ERM, notably, the role of the board in risk oversight and other governance issues. The rule also addressed the link between risk-taking, compensation incentives, and corporate governance leadership structures. This study addresses these gaps in the literature and specifically evaluates the links between firm reputation, Board risk oversight, and firm performance in the short and longer-term.
We find that both reputation and board risk oversight have direct positive impacts on long-term firm value and short-term performance. Other dimensions of ERM are also significant but negatively associated with firm performance, but taken together, board risk oversight and other ERM dimensions have positive long-term and short-term impacts on the firm, suggesting enhancing firm value and performance may be the reason for adopting ERM. We also find that the other SEC rule components, notably incentive compensation, also impact value. Finally, we find that ERM, especially through Board risk oversight, positively influences reputation, thus Board risk oversight both directly and indirectly increases firm value.

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