Study of the Relationship between Enterprise Risk Management and Corporate Performance
|School||Huazhong University of Science and Technology|
|Keywords||Enterprise Risk Management Internal Control CorporatePerformance|
Interest in enterprise risk management (ERM) has continued to grow inrecent years. Unlike traditional risk management where individual riskcategories are separately managed, ERM enables firms to manage a series ofrisks in an integrated, enterprise-wide fashion. Firms that engage in ERM areable to better understand the aggregate risk inherent in different businessactivities, which provides them with a more objective basis for resourceallocation. Despite the abundance of survey evidence on the prevalence andcharacteristics of ERM programs, quantitative research on such programs isstill relatively scarce. And in China research on ERM is still stay onqualitative description and contrast of concept.We develop an ERM Index (ERMI) based on COSO’s four objectives ofERM (strategy, operations, reporting, and compliance) to measure Chineselisted companies’ ERM effectiveness. Then we select a number of factors,such as company size and so on, to test the determinants of ERM implementation. Next the primary objective of our empirical analysis is toestimate the relation between ERM and corporate performance. Finally usinga hand-collected data about ERM classification dummy variable, we testERMI’s representation and empirical analysis’s results.Our results show that there are great differences in ERMI amongdifferent industries and regions. Besides more complex companies are morelikely to engage in ERM, and strengthen audit firms’ quality has a significantrole in promoting the implementation of ERM. Next controlling a series ofcontrol variables, we find that ERMI has a significant positive impact oncorporate performance, where corporate performance is measured by theone-year excess stock market return to shareholders. Finally, independentsamples t-test showed that measurement result of ERMI is consistent withresult derived from ERM classification dummy variables.