The Valuation Implications of Enterprise Risk Management Maturity

34 Pages Posted: 28 Aug 2015

See all articles by Mark Farrell

Mark Farrell

Queen's University Management School

Ronan Gallagher

University of Edinburgh - Edinburgh Business School

Date Written: September 2015

Abstract

Enterprise Risk Management (ERM) is the discipline by which enterprises monitor, analyze, and control risks from across the enterprise, with the goal of identifying underlying correlations and thus optimizing the risk‐taking behavior in a portfolio context. This study analyzes the valuation implications of ERM Maturity. We use data from the industry leading Risk and Insurance Management Society Risk Maturity Model over the period from 2006 to 2011, which scores firms on a five‐point maturity scale. Our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value, as measured by Tobin's Q. We find a statistically significant positive relation to the magnitude of 25 percent. Upon decomposition of the maturity score, we find that the most important aspects of ERM from a valuation perspective relate to the level of top-down executive engagement and the resultant cascade of ERM culture throughout the firm. Firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and correlations across the entire enterprise and as a consequence enhanced value when undertaking the ERM maturity journey ceteris paribus.

Suggested Citation

Farrell, Mark and Gallagher, Ronan, The Valuation Implications of Enterprise Risk Management Maturity (September 2015). Journal of Risk and Insurance, Vol. 82, Issue 3, pp. 625-657, 2015, Available at SSRN: https://ssrn.com/abstract=2652494 or http://dx.doi.org/10.1111/jori.12035

Mark Farrell (Contact Author)

Queen's University Management School ( email )

25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland

Ronan Gallagher

University of Edinburgh - Edinburgh Business School ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

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