The Impact of the Adoption of Enterprise Risk Management on the Industrial Financial Performance
Evidence from Sri Lanka
Enterprise risk management (ERM) has gained an increased attention during the recent past as an integrated approach to manage risk for creating and preserving firm value. The objective of this study is to explore and empirically verify as to whether the adoption of the ERM has an impact on the firm performance. This study uses both primary and secondary data pertaining to 129 companies listed on the Colombo Stock Exchange under the banking & finance, insurance, diversified, manufacturing, food and beverage and chemical and pharmaceutical sectors. Primary and secondary data are collected by distributing a survey questionnaire and analyzing the published financial statements of the observing companies. Researcher adopts ERM integrated framework suggested by the committee of sponsoring organization (COSO) of the Treadway Commission of the USA to assess the value relevance of ERM and uses return on equity (ROE) as a proxy to measure the firm performance. This study finds, except for control activities, none of the key ERM functions, suggested by the COSO’s ERM integrated framework, has a significant impact on the performance of listed companies. Internal environment, objective setting, and information & communication indicated a weak positive impact on the firm performance. Nevertheless, none of those impacts were statistically significant. Empirical evidence reveals that firms’ risk responding strategies have no impact on the performance. Surprisingly, monitoring of ERM functions has weak negative, but not significant, impact on the firm performance. These findings are contradictory with the theoretical expectation that the adoption of ERM practices has a positive impact on firm performance as confirmed by the prior researchers.
Altermeyer, L. (2004), Assessment of Texas State Government: Implementation of Enterpriser Risk Management Principles, Applied research projects, Texas State University-San Marcos. https://digital.library.txstate.edu/handle/10877/3593
Ansari, S., 2013. Impact of Information Technology in Developing Organizational Strategies and Processes, Inter disciplinary Journal of Contemporary Research in Business Vol. 4, No.12
Beasley, M.S, Clune, R. & Hermanson, D.R. (2005), Enterprise risk management: an empirical analysis of factors associated with extent of implementation. The Journal of Accounting and Public Policy. Vol.24, 521-531. http://dx.doi.org/10.1016/j.jaccpubpol.2005.10.001
Beasley, M.S., Branson, B.C., & Hancock, B.V., (2010), Current state of enterprise risk oversight and market perception of COSO’s ERM framework, COSO’s Report on ERM.
Beasley, M.S., Pagach, D., & Warr, R. (2008). The information conveyed in hiring announcements of senior executives overseeing enterprise-wide risk management process. Journal of Accounting, Auditing and Finance, 23(3) pp.311-332. https://doi.org/10.1177/0148558X0802300303
Beeler, J.D., J.E. Hunton, and B. Wier. 1999. Promotion Performance of Internal Auditors: A Survival Analysis. Internal Auditing. Volume 14, Number 4, (July/August): 3-14.
Bouaziz, Z. (2012). The impact of the presence of Audit Committees on the financial performance. International Journal of Management & Business Studies. Vol.2, issue 4.
Brown, L.D., & Caylor, M.L. (2004), Corporate governance and firm performance, http://dx.doi.org/10.1007/s11156-007-0082-3.
Chagadhari, M.F., & Chaleshtori, G.N. (2001), International conference on sociality and economic development, Conference proceedings, http://ssrn.com/abstract=2259541
COSO, Committee of sponsoring organization of Treadway commission. (2004). Enterprise risk management (ERM) integrated framework. COSO.
Deloitte & Touche LLP, Curtis, P., & Carey, M. (2012), Risk assessment in practice, Committee of sponsoring organization of the Treadway Commission
Eikenhout, L. (2015) Risk Management and Performance in Insurance Companies, an un publish Master thesis. http://essay.utwente.nl/66625/1/Eikenhout_MA_MB.pdf
Eniola, O. J., & Akinselure, O.P.(2016) Effect of Internal Control on Financial Performance of Firms in Nigeria, IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 18, Issue 10. Ver. IV (October. 2016), PP 80-85
Gates, S, Nicolas, J.L., & Walker, P.L. (2012). Enterprise risk management: A process for enhanced management and improved performance. Management Accounting Quarterly, pp.28-38. https://hal.archives-ouvertes.fr/hal-00857435
Golshan, N.M,& Rasid, S.Z.A. (2012), What Leads Firms to Enterprise Risk Management Adoption? A Literature Review, International Conference on Economics, Business and Marketing Management.
Hossein, G.M., & Mahdi, S. (2009). Corporate Governance and firm performance, Journal of Accounting Advances. Number 1 (57/3); page(s) 113-128.
Hoyt, R.E., & Liebenberg, A.P. (2011). The value of enterprise risk management, The Journal of Risk and Insurance, Vol. 78, No. 4, pp. 795-822. http://dx.doi.org/10.1111/j.1539-6975.2011.01413.x
Hoyt, R.E., Moore, D.L., & Liebenberg, A.B. (2008). The Value of Enterprise Risk Management: Evidence from the U.S. Insurance Industry. Society of Actuaries.
ISO 31000-2009, Enterprise Risk Management (2009), International organization for standardization.
Karunarathne, E.A.C.P., and Zhang, J. 2017. Implications of New Technological Adaptions on Switching Barriers: An Empirical Study of Mobile Telecommunication Subscribers in Sri Lanka, International Journal of Research in Business and Social Science, 6 (1), 2017:78-88. https://doi.org/10.20525/ijrbs.v6i1.642
Kinyua, J.K., Gakure, R., Gekara, M. and Orwa, G., 2015, Effect of Internal Control Environment on the Financial Performance of Companies Quoted in the Nairobi Securities Exchange, International Journal of Innovative Finance and Economics Research 3(4):29-48, Oct-Dec.
Kiprop, L. F. and Tenai, J., 2017, The effect of risk identification on performance of financial institutions, International Journal of Business Strategy ISSN 2519- 0857 (Paper) Vol.2, Issue 1 No.5, pp 75- 87, 2017
Lawrence A. Gordon, Martin P. Loeb, Chih-Yang Tseng, (2009) Enterprise risk management and firm performance: A contingency perspective, J. Account Public Policy.
Li, Q., Wu, Y., Ojiako, U., Marshall, A. & Chipulu, M., 2014, ‘Enterprise risk management and firm value within China’s insurance industry’, Acta Commercii 14(1), Art. #198, 10 pages. http://dx.doi.org/10.4102/ ac.v14i1.198
Liebenberg, A. P., & Hoyt, R. E. (2003). The determinants of enterprise risk management: evidence from the appointment of chief risk officers. Risk Management and Insurance Review, 6(1), 37-52. doi: http://dx.doi.org/10.1111/1098- 1616.00019/,DanaInfo=onlinelibrary.wiley.com ful.
Mahmood, Z., Amir, A, Javied , S., and Zafar, F., 2013, Strategic Management of Technology and Innovation, Global Journal of Management and Business Research Administration and Management Volume 13 Issue 12 Version 1.0
Monda, B. and Giorgino, M. (2013). An ERM maturity model. SSRN Electronic Journal.
Moutinho, V.N. (2012), Audit fees and firm performance, Dissertation submitted to partial fulfillment of the masters in finance.
Munene, M.J., 2013, effect of internal controls on financial performance of technical training institutions in Kenya, An un-published masters dissertation.
Mustafa, E.C., Murat, C., and Necati, E.E., 2016. The Role of Social Media in Crisis Communication and Crisis Management, International Journal of Research in Business & Social Science 5 (3), 2016:111-120. https://doi.org/10.20525/ijrbs.v5i3.279
Mutinda , V. and Kiruja, E. , 2015, Role of monitoring and Evaluation on performance of public organization projects in Kenya: A case of Kenya Meat Commission , International Journal of Innovative Development & Policy Studies 3(3):12-27, July-Sept.
Najjar, D.A, (2015), The effect of institutional ownership on firm performance: Evidence from Jordanian Firms. International Journal of Economics and Finance. Vol 7, No.12. http://dx.doi.org/10.5539/ijef.v7n12p97
Njagi, C. (2015), Evaluation of the level of enterprise risk management adoption and maturity of the insurance companies in Kenya. An MBA project report.
Olugbode, M. Elbeltagi, I. Simmons, M. and Biss, T.,2008, “The Effect of Information Systems on Firm Performance and Profitability Using a Case-Study Approach.” The Electronic Journal Information Systems Evaluation Volume 11 Issue 1, pp. 11-16, available online at www.ejise.com
Otieno, O.J., (2012), Relationship between enterprise risk management practices and financial performance of non-financial firms listed in Nairobi Securities Exchange
Paape, L & Spekle, R.F. ,(2012), The adoption and design of enterprise risk management practices: an empirical study, European Accounting Review, 21:3, 533-564. http://dx.doi.org/10.1080/09638180.2012.661937
Pae, J.H., Jang, S.H., 2002. The impact of technology advancement strategies on consumers’ patronage decisions, Journal of product innovation management- 19, 375-383 DOI:10.1111/1540-5885.1950375
Pagach, D., & Warr, R. (2008),The Characteristics of Firms that Hire Chief Risk Officers, College of Management North Carolina State University .
Pagach, D., & Warr, R. (2010). The effects of enterprise risk management on firm performance. Electronic article, papers.ssrn.com. http://ssrn.com/abstract=1155218
Pagach, D., Warr, R. (2011). The characteristics of firms that hire chief risk officers, The Journal of Risk and Insurance, Vol. 78, No. 1, pp. 185- 211., DOI:10.1111/j.1539-6975.2010.01378.x
Quon, T.K., Zeghala, D. and Maingo, M. (2012), Enterprise risk management and firm performance, Procedia - Social and Behavioral Sciences 62, 263 – 267
Rao, A. and Marie, A., (2007). Current practices of enterprise risk management in Dubai, Management Accounting Quarterly, Spring. PP.10-22
Soliman, A and Mukhtar, A. (2017) Enterprise Risk Management and firm performance: an integrated model for the banking sector. Banks and Bank Systems (open-access), 12(2), 116-123, http://dx.doi.org/10.21511/bbs.12(2).2017.12
Solomon, D.C and Muntean, M., (2012), Assessment of Financial Risk in Firm’s Profitability Analysis, Economy Transdisciplinarity Cognition, Vol. 15, Issue 2
Stanley, J.D. (2011), Is the Audit Fee Disclosure a Leading Indicator of Clients' Business Risk?. AUDITING: A Journal of Practice & Theory: August 2011, Vol. 30, No. 3, pp. 157-179. DOI: 10.2308/ajpt-10049
Steffan, B. (2008) Essential Management Accounting: How to Maximise Profit and Boost Financial , Kogan Page Publishers, 2008
Tahir, I.M and Razali, A.R, (2011). The relationship between enterprise risk management (ERM) and firm value: Eveidence from Malaysian public listed companies, International journal of economics and management sciences
Tjahjono, S. (2017), Enterprise Risk Management Implementation Maturity in Financial Companies, Etikonomi, Vol. 16, pp 173-186. http://dx.doi.org/10.15408/etk.v16i2.5440
Vollmer, S, 2015, 6 steps to manage risks and drive performance, CGMA Magazine
Wholey, J., Hatry, H., & Newcomer, K. (2010). Handbook of practical program evaluation. 3rd edition San Francisco: Jossey-Bass
Xaxx, J. Website article on: The Impact of Communication on the Decision-Making Process in an Organization, http://smallbusiness.chron.com/impact-communication-decisionmaking-process-organization-24398.html (accessed 30.09.2017)
Copyright (c) 2017 International Journal of Research in Business and Social Science (2147-4478)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Authors contributing to IJRBS agree to publish their articles under the Creative Commons Attribution- 4.0 NC license, allowing third parties to share their work (copy, distribute, transmit) and to adapt it, under the condition that the authors are given credit, that the work is not used for commercial purposes, and that in the event of reuse or distribution, the terms of this license are made clear. Authors retain copyright of their work, with first publication rights granted to IJRBS. However, authors are required to transfer copyrights associated with commercial use to the Publisher. The authors agree to the terms of this Copyright Notice, which will apply to this submission if and when it is published by this journal
Submission of an article implies that the work described has not been published previously( exceptin the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, it will not be published elsewhere in the same form, in English or in any other languages, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication