The Effects of Enterprise Risk Management on Firm Performance

Strategic Risk Management

“…In the ERM literature, proponents claim that the underlying objective of ERM is to increase shareholder value and firm performance Pagach and Warr, 2010). Further, ERM adds value by reducing or eliminating "costly lower-tail outcomes" Pagach and Warr, 2010) such as financial distress .…”

“…Further, ERM adds value by reducing or eliminating "costly lower-tail outcomes" Pagach and Warr, 2010) such as financial distress . On the other hand, ERM should not only protect against lower-tail outcomes but it should support the firm in recognizing untapped opportunities .…”

“…Although the effect on leverage from ERM adoption is ambiguous (Pagach and Warr, 2010), one can assume that if firms have decided to lower the probability of financial distress, a reduction in financial leverage as a consequence of ERM seems likely . As leverage increases financial risk (Miller and 139 Bromiley, 1990) and studies have found that high leverage is a primary cause of financial distress (Al-Najjar and Taylor, 2008;Leland and Pyle, 1977).…”

“…By maintaining low leverage ratios, firms retain more capital reserves as a buffer to absorb adverse impacts from risk exposures ) and thereby decrease the probability of financial distress (Meulbroek, 2002). Hence, further investigation of ERM and strategic planning's effect on financial leverage (or what has been defined as the indirect effect on the probability of financial distress (Pagach and Warr, 2010)) seems merited.…”

“…A few studies have shown a positive relationship (Eckles, Hoyt, and Miller, 2014;Grace, Leverty, Phillips, and Shimpi, 2014;, others find no beneficial effects (Pagach and Warr, 2010;Quon, Zeghal, and Maingot, 2012;Sekerci, 2012), while Lin, Wen, and Yu (2011) show that it erodes firm value. Such inconsistencies raise questions about whether the anticipated beneficial effects of ERM can be realized.…”