Why do firms adopt enterprise risk management (ERM)? Empirical evidence from France

TLDR

Enterprise risk management (ERM) is a risk‑management approach that integrates all organization‑wide risks and adopts a portfolio perspective. The paper investigates the factors that influence a firm’s decision to adopt ERM. Using a Cox proportional hazards model, the authors analyze a unique sample of French firms identified through chief risk officer announcements and annual reports from 1999 to 2008. The results show that regulatory pressure, internal risk indicators such as expected probability of financial distress, costs, poor earnings, growth opportunities, and board independence all motivate firms to adopt ERM, offering empirical evidence from French firms.

Abstract

Purpose Enterprise risk management (ERM) is a risk management approach that calls for integrating all the organization-wide risks and takes a portfolio view point of managing organizational risks. The purpose of this paper is to investigate the factor that influence a firm’s decision to adopt ERM. Design/methodology/approach The authors employ a particular technique of survival data analysis, the Cox proportional hazards model, to investigate the factors that lead towards the decision of initiating an ERM programme. The authors constructed a unique sample of French firms derived from the information in 315 corporate news announcements for the hiring of a chief risk officer and information retrieved from publicly available annual reports to identify firms that initiated an ERM programme, over the period from year 1999 to 2008. Findings The results suggest that besides the growing international and local regulatory pressure, factors that are internal to the organizations like the expected probability of financial distress and its explicit and implicit costs, poor earnings performance and the existence of growth opportunities play vital role in motivating firms to adopt ERM. It was also found that corporate governance practices such as the independence of the board may also lead towards an initiation of the ERM. Originality/value This study makes theoretical and methodological contribution the ERM literature by employing a novel methodology and presenting empirical evidence based on data form French firms.