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The Value of Enterprise Risk Management: Evidence from the U.S. Insurance Industry
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Enterprise risk management (ERM) has been the topic of increased media attention in recent years. Many organizations have implemented ERM programs, consulting firms have established specialized ERM units, and universities have developed ERM-related courses and research centers. Despite the heightened interest in ERM by academics and practitioners, there is an absence of empirical evidence regarding the impact of such programs on firm value. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We use a Heckman two-stage selection correction model to first explain ERM in terms of its determinants, and then to model its effect on firm value, controlling for potential selectivity bias. In our first stage ERM-choice probit regression we find ERM usage to be positively related to firm size, international diversification, and institutional ownership. By focusing on publicly-traded insurers we are able to calculate Tobin’s Q, a standard proxy for firm value, for each insurer in our sample. In the second stage we then model Tobin’s Q as a function of ERM use and a range of other determinants. We find a positive relation between firm value and the use of ERM. The ERM premium is statistically and economically significant and approximately 3.6% of firm value.
Robert E. Hoyt and Andre P. Liebenberg - Personal Name
NONE
Management
English
1-31
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