Enterprise Risk Management: the Transformation of Board-Level Engagement as Evidenced by Disclosure Timothy L. Baker (DBA Graduate), Divesh S. Sharma (Dissertation Chair), and Mark Beasley (Second Supervisor)
Overview
The benefit of investing in enterprise risk management (ERM) practices is controversial. This study developed a novel tool - the board-level ERM engagement index (BODERMX) - to determine the value of board oversight of ERM practices at S&P 500 firms to various stakeholders. Higher BODERMX values indicate more robust ERM practices. The index reveals associations between the extent of board engagement in ERM and (i) earnings volatility, (ii) firm valuation, and (iii) the pricing of external audit services. Regression results indicate that BODERMX is not significantly related to external audit fees but significantly negatively associated with earnings volatility and |firm valuation (Tobin’s Q). Collectively, they suggest that firms that invest in board-level ERM practices reduce the risk of wide earnings fluctuations over time; hence, investors who attach lower value to them are mistaken, while auditors are indifferent. Clearly, these practices have differential value across stakeholders.
16 | DBA Summaries
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