Mark Farrell is at the Management School, Queens University, Belfast. Ronan Gallagher is at the Business School, University of Edinburgh. The authors can be contacted via e-mail: email@example.com and firstname.lastname@example.org, respectively. The authors declare that no potential conflicts of interest arise in this work with respect to the research, authorship, and/or publication of this article.
The Valuation Implications of Enterprise Risk Management Maturity
Version of Record online: 10 MAR 2014
© 2014 The Journal of Risk and Insurance
Journal of Risk and Insurance
Volume 82, Issue 3, pages 625–657, September 2015
How to Cite
Farrell, M. and Gallagher, R. (2015), The Valuation Implications of Enterprise Risk Management Maturity. Journal of Risk and Insurance, 82: 625–657. doi: 10.1111/jori.12035
- Issue online: 26 AUG 2015
- Version of Record online: 10 MAR 2014
Enterprise Risk Management (ERM) is the discipline by which enterprises monitor, analyze, and control risks from across the enterprise, with the goal of identifying underlying correlations and thus optimizing the risk-taking behavior in a portfolio context. This study analyzes the valuation implications of ERM Maturity. We use data from the industry leading Risk and Insurance Management Society Risk Maturity Model over the period from 2006 to 2011, which scores firms on a five-point maturity scale. Our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value, as measured by Tobin's Q. We find a statistically significant positive relation to the magnitude of 25 percent. Upon decomposition of the maturity score, we find that the most important aspects of ERM from a valuation perspective relate to the level of top–down executive engagement and the resultant cascade of ERM culture throughout the firm. Firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and correlations across the entire enterprise and as a consequence enhanced value when undertaking the ERM maturity journey ceteris paribus.