ENTERPRISE RISK MANAGEMENT and FIRM VALUE Empirical Evidence from Turkey in the Post-Global Financial Crisis of 2007-08 Period

Year 2023, Volume: 5 Issue: 1, 87 - 100, 04.07.2023

Hüseyin Nazmi Kartal Demirgüneş

Abstract

Though there is an intense concern of governments, corporations’ top managers, business magazines and B2B, professional and trade magazine publishers about risk management practices, both theoretical and empirical research in the field of enterprise risk management (ERM) is still rare. This study aims to fill the empirical research gap by analyzing the possible effects of ERM practices on firm value over the post-Global Financial Crisis of 2007-08 period on a sample of Borsa Istanbul (BIST) SME Industrial Index (XKOBI) firms for the period of 2014.q1-2022.q4. Research model of the study includes one dependent and four independent variables. The dependent variable is the market-to-book value ratio, a widely-used proxy for firm value in finance literature. Considering the literature, four firm-specific factors are included in the research model as independent variables as credit risk, foreign exchange risk, liquidity risk and financial leverage.
The empirical findings provide evidence that financial leverage has statistically significant and positive effect on firm value; while the other independent variables included in the research model as credit risk, foreign exchange risk and liquidity risk have statistically significant and negative effects on firm value.

Keywords

Enterprise risk management, firm value, credit risk, foreign exchange risk, liquidity risk.

References

• Allayannis, G. and Weston, J. P. (2001). The Use of Foreign Currency Derivatives and Firm Value. The Review of Financial Studies, 14(1), 243-276.
• Allayannis, G., Lel, U. and Miller, D. P. (2012). The Use of Foreign Currency Derivatives, Corporate Governance, and Firm Value Around the World. Journal of International Economics, 87(1), 65-79.
• Anton, S. G. (2018). The Impact of Enterprise Risk Management on Firm Value: Empirical Evidence from Romanian Non-Financial Firms. Engineering Economics, 29(2), 151-157.
• Anton, S. G. and Nucu, A. E. A. (2020). Enterprise Risk Management: A Literature Review and Agenda for Future Research. Journal of Risk and Financial Management, 13(281), 1-22.
• Arellano, M. and Bond, S. (1991). Some Tests Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), 277-297.
• Aretz, K., Bartram, S. M. and Dufey, G. (2007). Why Hedge? Rationales for Corporate Hedging and Value Implications. Journal of Risk Finance, 8(5), 434-449.
• Aven, T. (2016). Risk Assessment and Risk Management: Review of Recent Advances on Their Foundation. European Journal of Operational Research, 253(1), 1-13.
• Barton, T. L., Shenika, W. G. and Walker, P. L. (2002). Making Enterprise Risk Management Pay Off: How Leading Companies Implement Risk Management. Financial Times/Prentice Hall PTR., New Jersey.
• Bartram, S. M., Brown, G. W. and Conrad, J. (2011). The Effects of Derivatives on Firm Risk and Value. Journal of Financial and Quantitative Analysis, 46(4), 967-999.
• Baxter, R., Bedard, J. C., Hoitash, R. and Yezegel, A. (2013). Enterprise Risk Management Program Quality: Determinants, Value Relevance, and the Financial Crisis. Contemporary Accounting Research, 30(4), 1264-1295.
• Beasley, M., Clune, R. and Hermanson, D. R. (2005). Enterprise Risk Management: An Empirical Analysis of Factors Associated with the Extent of Implementation. Journal of Accounting and Public Policy, 24(6), 521-531.
• Beasley, M., Pagach, D., Warr, R. (2008). Information Conveyed in Hiring Announcements of Senior Executives Overseeing Enterprise-Wide Risk Management Processes. Journal of Accounting, Auditing and Finance, 23(3), 311-332.
• Belmont, D. P. (2004). Value Added Risk Management in Financial Institutions: Leveraging Basel II and Risk Adjusted Performance Management. Wiley Finance Series. John Wiley & Sons Asia, Singapore.
• Bertinetti, G. S., Cavezzali, E. and Gardenal, G. (2013). The Effect of the Enterprise Risk Management Implementation on the Firm Value of European Companies. Working Paper, Available at: http://virgo.unive.it/wpideas/storage/2013wp10.pdf.
• Bessembinder, H. (1991). Forward Contracts and Firm Value: Investment Incentive and Contracting Effects. Journal of Financial and Quantitative Analysis, 26(4), 519-532.
• Bessis, J. (2015). Risk Management in Banking. 4th Edition, John Wiley & Sons Ltd, United Kingdom.
• Blanco-Mesa, F., Rivera-Rubiano, J., Patiño-Hernandez, X. and Martinez-Montaña, M. (2019). The Importance of Enterprise Risk Management in Large Companies in Colombia. Technological and Economic Development of Economy, 25(4), 600-633.
• Bromiley, P., McShane, M., Nair, A. and Rustambekov, E. (2015). Enterprise Risk Management: Review, Critique, and Research Directions. Long Range Planning, 48(4), 265-276.
• Brown, I., Steen, A. and Foreman, J. (2009). Risk Management in Corporate Governance: A Review and Proposal. Corporate Governance: An International Review, 17(5), 546-558.
• Carter, D. A., Rogers, D. A. and Simkins, B. J. (2006). Does Hedging Affect Firm Value? Evidence from the US Airline Industry. Financial Management, 35(1), 53-86.
• CAS (2003). Overview of enterprise risk management. Available at: https://www.casact.org/area/erm-/overview.pdf.
• Christie, L. (2006). Real Estate Cools Down, CNNMoney.com. Available at: http://money.cnn.com/2006/05/15/-real_estate-/NAR_firstQ2005_home_prices/index.htm.
• Çırpan, H. and Alayoğlu, N. (2018). Challenges of Turkish Family Businesses Related to Effective Management Strategies. In Turkish Economy: Between Middle Income Trap and High-Income Status (Eds.: Aysan, A. F.,
• Babacan, M., Gür, N. and Karahan, H.), Springer, 385-409. COSO (2004). Enterprise risk management: Integrated Framework. Available at: http://www.coso.org/-documents/coso_erm_-executivesummary.pdf.
• Dickinson, G. (2001). Enterprise Risk Management: Its Origins and Conceptual Foundation. Geneva Papers on Risk and Insurance, 26(3), 360-366.
• Eckles, D. I., Hoyt, R. E. and Miller, S. M. (2014). The Impact of Enterprise Risk Management on the Marginal Cost of Reducing Risk: Evidence from the Insurance Industry. Journal of Banking and Finance, 43(1), 247-261.
• Ellul, A. and Yerramilli, V. (2013). Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies. The Journal of Finance, 68(5), 1757-1803. EU Commission (2021). 2021 SME Country Fact Turkey.
• Farrell, M. and Gallagher, R. (2015). The Valuation Implications of Enterprise Risk Management Maturity. The Journal of Risk and Insurance, 82(3), 625-657.
• Fauver, L. and Naranjo, A. (2010). Derivative Usage and Firm Value: The Influence of Agency Costs and Monitoring Problems. Journal of Corporate Finance, 16(5), 719-735.
• Fligstein, N. and Habinek, J. (2011). This Time It’s Different: The Spread of the Worldwide Financial Crisis, 2007-2010. Working Paper, University of California Berkeley, Department of Sociology, United States.
• Florio, C. and Leoni, G. (2017). Enterprise Risk Management and Firm Performance: The Italian Case. The British Accounting Review, 49(1), 56-74.
• Fraser, J. and Simkins, B. J. (2010). Enterprise Risk Management. The Robert W. Kolb series in finance, Wiley, Hoboken, New Jersey.
• FRC (2011). Boards and Risk: A Summary of Discussions with Companies, Investors and Advisers. Financial Reporting Council, London.
• FRC (2012). Guidance on Audit Committees. Financial Reporting Council, London.
• FRC (2014a). The UK Corporate Governance Code. Financial Reporting Council, London.
• FRC (2014b). Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. Financial Reporting Council, London.
• Froot, K. A., Scharfstein, D. S. and Stein, J. C. (1993). Risk Management: Coordinating Corporate Investment and Financing Policies. The Journal of Finance, 48(5), 1629-1658.
• Gordon, L. A., Loeb, M. P. and Tseng, C.-Y. (2009). Enterprise Risk Management and Firm Performance: A Contingency Perspective. Journal of Accounting and Public Policy, 28 (4), 301-327.
• Grace, M. F., Leverty, J. T., Phillips, R. D. and Shimpi, P. (2015). The Value of Investing in Enterprise Risk Management. The Journal of Risk and Insurance, 82(2), 289-316.
• Graham, J. and Rogers, D. (2002). Do Firms Hedge in Response to Tax Incentives?. Journal of Finance, 57(2), 815-839.
• Griffin, J. M. and Lemmon, M. L. (2002). Book-to-Market Equity, Distress Risk, and Stock Returns. The Journal of Finance, 57(5), 2317-2336.
• Guay, W. and Kothari, S. P. (2003). How Much Do Firms Hedge with Derivatives?. Journal of Financial Economics, 70(3), 423-461.
• Hampton, J. J. (2009). Fundamentals of Enterprise Risk Management: How Top Companies Assess Risk, Manage Exposure, and Seize Opportunity. AMACOM, New York.
• Higgs, D. (2003). Review of the Role and Effectiveness of Non-Executive Directors. DTI: London.
• HM Treasury. (2004). The Orange Book Management of Risk - Principles and Concepts, HM Treasury. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191513/-The_Orange_Book.pdf.
• Hoyt, R. E. and Liebenberg, A. P. (2006). The Value of Enterprise Risk Management: Evidence from the U.S. Insurance Industry. Available at: http://www.aria.org/meetings/2006papers/Hoyt_Liebenberg_ERM_070606.pdf
• Hoyt, R. E. and Liebenberg, A. P. (2011). The Value of Enterprise Risk Management. Journal of Risk and Insurance, 78(4), 795-822.
• Hsiao, C. (2007). Panel Data Analysis - Advantages and Challenges. TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, 16(1), 1-22.
• Im, K. S., Pesaran, M. H. and Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115(1), 53-74.
• Iswajuni I., Manasikana, A. and Soetedjo, S. (2018). The Effect of Enterprise Risk Management (ERM) on Firm Value in Manufacturing Companies Listed on Indonesian Stock Exchange Year 2010-2013. Asian Journal of Accounting Research, 3(2), 224-235.
• Jin, Y. and Jorion, P. (2006). Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers. The Journal of Finance, 61(2), 893-919.
• Kauffman, H. (2009). The Road to Financial Reformation: Warnings, Consequences, Reforms. Wiley, New York.
• Khan, M. J., Hussain, D. and Mehmood, W. (2016). Why Do Firms Adopt Enterprise Risk Management (ERM)? Empirical Evidence from France. Management Decision, 54(8), 1886-1907.
• Kirchhoff, S. (2005). Subprime Lending a Worry for Fed Exec. USA Today, January 13.
• Kleffner, A. E., Lee, R. B. and McGannon, B. (2003). The Effect of Corporate Governance on the Use of Enterprise Risk Management: Evidence from Canada. Risk Management and Insurance Review, 6(1), 53-73. Lam, J. (2014). Enterprise Risk Management: From Incentives to Controls. John Wiley & Sons, Inc., Hoboken, New Jersey.
• Lee, S.-H. and Makhija, M. (2009). Flexibility in Internationalization: Is It Valuable During an Economic Crisis?. Strategic Management Journal, 30(5), 537-555.
• Levin, A., Lin, C.-F. and Chu, C.-S. J. (2002). Unit Root Tests in Panel Data: Asymptotic and Finite-sample Properties. Journal of Econometrics, 108(1), 1-24.
• Liebenberg, A. P. and Hoyt, R. E. (2003). The Determinants of Enterprise Risk Management: Evidence from the Appointment of Chief Risk Officers. Risk Management and Insurance Review, 6(1), 37-52.
• Maddala, G. S. and Wu, S. (1999). A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test. Oxford Bulletin of Economics and Statistics, 61(51), 631-652.
• Maldonado-Guzman, G., Marin-Aguilar, J., and Garcia-Vidales, M. (2018). Innovation and Performance in Latin-American Small Family Firms. Asian Economic and Financial Review, 8(7), 1008-1020.
• Malik, M. F., Zaman, M. and Buckby, S. (2020). Enterprise Risk Management and Firm Performance: Role of the Risk Committee. Journal of Contemporary Accounting and Economics, 16(1), 1-22.
• Manab, N. A., Kassim, I. and Hussin, M. R. (2010). Enterprise-Wide Risk Management (EWRM) Practices Between Corporate Governance Compliance and Value Creation. International Review of Business Research Papers, 6(2), 239-252.
• Maroofi, F., Ardalan, A. G., and Tabarzadi, J. (2017). The Effect of Sales Strategies in the Financial Performance of Insurance Companies. International Journal of Asian Social Science, 7(2), 150-160.
• McShane, M., Nair A. and Rustambekov, E. (2011). Does Enterprise Risk Management Increase Firm Value?. Journal of Accounting, Auditing and Finance, 26(4), 641-658.
• Milos Sprcic, D., Mesin Zagar, M., Sevic, Z. and Marc, M. (2016). Does Enterprise Risk Management Influence Market Value - A Long-Term Perspective. Risk Management, 18(2/3), 18-65.
• Modigliani, F. and Miller, M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261-297.
• Modigliani, F. and Miller, M. (1963). Corporate Income Taxes and the Cost of Capital: A Correction". American Economic Review, 53(3), 433-443.
• Monda, B. and Giorgino, M. (2013). An ERM Maturity Model. SRRN Working Paper, Available at: http://ssrn.com/abstract=2198944http://dx.doi.org/10.2139/ssrn.2198944.
• Neal, T. (2014). Panel Cointegration Analysis with Xtpedroni. The Stata Journal, 14(3), 684-692.
• Nelson, J., Moffitt, J. S. and Affleck-Graves, J. (2005). The Impact of Hedging on the Market Value of Equity. Journal of Corporate Finance, 11(5), 851-881.
• Nocco, B. W. and Stulz, R. M. (2006). Enterprise Risk Management: Theory and Practice. Journal of Applied Corporate Finance, 18(4), 8-20.
• Norris, F. (2008). United Panic. The New York Times, October 24. OECD. (2008). Public-Private Partnerships: In the Pursuit of Risk-Sharing and Value for Money, OECDiLibrary. Available at: https://www.oecd-ilibrary.org/governance/public-private-partnerships_9789264046733-en.
• Paape, L., and Spekle, R. F. (2012). The Adoption and Design of Enterprise Risk Management Practices: An Empirical Study. European Accounting Review, 21(3), 533-564.
• Pagach, D. P. and Warr, R. S. (2010). The Effects of Enterprise Risk Management on Firm Performance. Available at: SSRN: https://ssrn.com/abstract=1155218 or http://dx.doi.org/10.2139/ssrn.1155218.
• Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61(1), 653-670.
• Pedroni, P. (2000). Fully-modified OLS for Heterogeneous Cointegrated Panels. Advances in Econometrics, 15, 93-130.
• Pedroni, P. (2004). Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the Ppp Hypothesis. Econometric Theory, 20, 597-625.
• Porras, E. R. (2011). The Cost of Capital. Palgrave Macmillan, New York.
• Rawdanowicz, L. (2009). The 2008-09 Crisis in Turkey: Performance, Policy Responses and Challenges for Sustaining the Recovery. OECD Economics Department Working Papers No. 819, www.oecd.org/workingpapers.
• Sayılır, Ö. and Farhan., M. (2017). Enterprise Risk Management and Its Effect on Firm Value in Turkey. Journal of Management Research, 9(1), 86-99.
• SBA (2021). US Small Business Association (SBA) Report 2021.
• Şenol, Z. and Karaca, S. S. (2017). The Effect of Financial Risks on Firm Value: ISE Case. Gazi Journal of Economics and Business, 3(1), 1-18.
• Silva, J. R., De Silva, A. F. and Chan, B. L. (2019). Enterprise Risk Management and Firm Value. Emerging Markets Finance and Trade, 55(3), 687-703.
• Smith, C. W. and Stulz, R. (1985). The Determinants of Firms' Hedging Policies. Journal of Financial and Quantitative Analysis, 20(14), 391-405.
• Stulz, R. M. (1984). Optimal Hedging Policies. Journal of Financial and Quantitative Analysis, 19(2), 127-140.
• Walker, D. (2009). A Review of Corporate Governance in UK Banks and Other Financial Industry Entities. London.