@Risk

These days, risk management –in one form or another –is making its way to the top of everyone’s business agenda. Somehow, we all seem to instinctively know that “an ounce of prevention is worth a pound of cure.”

But, wouldn’t it be great to have proof that this old maxim is true?  Wouldn’t you like to see data –actual empirical evidence –that showed the impact of risk management on firm value?

Well, now you can.

A new report, titled “The Value of Enterprise Risk Management,” by Robert E. Hoyt, University of Georgia – C. Herman and Mary Virginia Terry College of Business, and Andre P. Liebenberg, University of Mississippi – School of Business Administration, claims to be one of the first studies ever to document the relevance of ERM.

In order to control for difference in regulatory and market factors across industries, this new study focused solely on publicly-traded U.S. insurers (a total of 117 of them, in all). Since insurers were among the first industries to adopt ERM (some started back in 1998), this is a reasonable approach, but it’s important to remember that the conclusions are based only on this one specific sector.

The 40-page report presents a detailed discussion of study methodology, modeling, and analytics. It includes numerous tables and charts, plus an extensive list of references. Ultimately, Hoyt and Liebenberg distill all the data into a simple, but powerful, statement:

“In our ERM-choice equation we find ERM usage to be positively related to factors such as firm size and institutional ownership, and negatively related to reinsurance use, leverage, and asset opacity. By focusing on publicly-traded insurers we are able to estimate the effect of ERM on Tobin’s Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM.”

How positive, exactly?

The study calculations show an ERM premium of 16.5%, a result that, as the authors prove, is statistically and economically significant and robust to a range of alternative specifications of both the ERM and value equations.

Hoyt and Liebenberg are careful to point out that this result is only one piece of a large and complex puzzle. I’ll agree with them on this: The next step is research aimed at understanding specifically how ERM contributes to firm value.

The full report is available for free download at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1440947.