Testing the effectiveness of ERM: Evidence from operational losses

Khalid Al-Amri and Yevgeniy Davydov

Journal of Economics and Business, 2016, vol. 87, issue C, 70-82

Abstract: Enterprise Risk Management (ERM) provides a novel approach to managing all risks faced by a firm as a portfolio. By forming a portfolio of risks firms can optimally choose strategies to hedge their overall risk. This study investigates ERM implementation across a broad spectrum of industries. In particular, we examine the effectiveness of ERM in improving firm internal controls by its impact on operational risk. Our findings suggest that ERM is effective in reducing both the frequency and severity of operational risk events. We find that firms with ERM programs on average experience a 63% reduction in the frequency of operational risk events and up to a 35% reduction in operational losses. The findings still hold after controlling for endogenous selection.

Keywords: Operational risk; Enterprise Risk Management; Corporate risk management (search for similar items in EconPapers)
JEL-codes: G20 G32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:87:y:2016:i:c:p:70-82

DOI: 10.1016/j.jeconbus.2016.07.002

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