The Importance Of Enterprise Risk Management

Companies apply risk management for several reasons. Some of these analytical causes include reducing tax payments, lessening financial distress, underinvesting, moderating nonsymmetrical data, diminishing undiversifiable shareholders, managerial risk aversion, alleviating agency costs, and enabling to perform net present value (NPV) projects – where external financing is more expensive than the internal one (McShane, Nair & Rustambekov, 2010; Mayers and Smith, 1982; Stulz, 1984; Smith and Stulz, 1985; Froot, Scharfstein and Stein, 1993; and Myers, 1977). The idea of risk management is rooted to challenge the “theory of irrelevance propositions” theorized by Modigliani & Miller (1958) which claims that any financing policies and decisions

To begin with is the inquiry provided by Lin, Wen, and Yu (2010), debates that enterprise risk management is rather a value-destroying approach for firms. A number of journals disclose for no support regarding the effect of ERM on firms. Initially, Sekerci (n.d.), verify an insignificant correlation of firm value and ERM after manipulating the variables for the determinants of firm value. This contingent outcome is alike with Beasley, Pagach, and Warr (2008) who confirms that ERM is a non-adding value approach after reviewing the financial performance of their samples. McShane, Nair, and Rustambekov (2011) disclose a growth in ERM capacity and a firm 's worth. Unfortunately, an inconclusive effect is mentioned regarding the value-relevance of ERM. Equally important is the work by Gordon, Loeb, and Tseng (2009) which finds that the relationship of ERM and firm relationship is contingent over the union of ERM with the following factors: environmental uncertainty, industry competition, firm size, firm complexity, and board of directors ' monitoring. The three papers emphasize the contributioon of enterprise risk management (ERM) to the firm value of publicly listed insurance companies, which are persistent with the argument of Hoyt and Liebenberg (2010). First, Eckles, Hoyt, and Miller (2011) who exhibit the declination of risk for stock and investing returns after the implementation of enterprise risk management (ERM). An additional result is that the operating profits from the ratio of return on assets to return volatility (ROA / return volatility), or returns per unit risks increase the aftermath of enterprise risk management enactment. Second, Ai, Bajtelsmit, and Wang (2014) proved the latter by stating that aside from the firm value of insurance companies, the return of assets have found to have a substantial effect from ERM. In the same way, a business