Abstract:

This paper develops a conceptual framework that explores the relationship between Enterprise Risk Management (ERM) and fundamental value of the company. The aim of the paper is to build ERM theory by providing better understanding how ERM works within the company. This explorative study was conducted from the viewpoint of shareholder’s value because, as clearly defined in the existing literature, the primary aim of ERM is to increase the likelihood that company’s strategic objectives are realized and shareholders’ value is preserved and enhanced. Starting from two commonly used models of corporate valuation, residual income model (RI) and discounted cash flow model (DCF), six value drivers are identified through which ERM can affect company’s value. The conceptual framework presented in this paper cannot a priori predict how ERM affects company’s value, but it clearly shows venues of value creation where ERM activities should be directed in order to accomplish fundamental company’s goal. Propositions of the model should contribute to the future ERM research aiming to explore them empirically among companies that implemented ERM.