Abstract:

Enterprise Risk Management (ERM) is an important element of an effective corporate governance system. It is defined as a combination of activities and strategies that result in reduction of a negative impact ofvarious types of risks -financial, operational and strategic -to the planned business results and value created to all company’s stakeholders (Miloš Sprčić, 2013). ERM has been applied in financial institutions and corporations since the beginning of 21stcentury, especially in the U.S. and Western Europe, and the number of users has increased significantly in recent years. There is a belief among increasing number of scholars (e.g., see Lam, 2003; Liebenberg and Hoyt, 2003; Nocco and Stulz, 2006; Beasley et al., 2005; 2008) that ERM offers companies a more comprehensive approach toward risk management in comparison to the traditional silo-based risk management perspective (TRM). Expert literature assumes that the implementation of an integrated risk management reduces the overall risk exposure of the organisation and increases its effectiveness, especially during extraordinary market conditions such as the financial crisis. It is also assumed that a company which implemented ERM is better prepared for thenegative impact of various risk factors that come from internal or external environment, and is therefore more successful in comparison to competitors who do not manage risks on an integrated basis. However, comprehensive research to prove a significant relationship between the use of ERM and performance indicators of business enterprises in a crisis has not been conducted so far. We believe that our research is important and relevant because, although many authors claim that management of corporate risks will stabilize expected earnings and cash flows reducing the probability of financial distress, increase the growth potential of the company and finally increase company’s value, there has been little empirical evidence on how ERM really affects those firms that have implement it. The aim of this empirical study is to fill a literature gap by providing empirical evidence on the actual impact of ERM to corporate financial performancein a period of severe market conditions. The study was conducted on the U.S. market on non-financial companies, constituents of the market index S&P 500. By applying fixed-effect Panel data, it is analysed if companies with ERM were more successful in the period of the financial crisis (2008-2012) compared to companies with similar characteristics which did not implement ERM.