An Empirical Investigation of the Characteristics of Firms Adopting Enterprise Risk Management

This paper uses a hazard model approach to examine the factors that influence firm level adoption of enterprise risk management (ERM). Enterprise risk management provides a process by which a firm integrates all of its risk management functions. We proxy the decision to implement ERM with the decision to hire a Chief Risk Officer (CRO) or similar senior level executive. We find that firms that are more levered, have more volatile earnings and have exhibited poorer stock market performance are more likely to initiate an ERM program. When the value of the CEO’s option and stock portfolio is increasing in stock volatility, the firm is also more likely to appoint a CRO. This latter finding is consistent with the Board implementing ERM to offset the risk taking incentives being granted to the CEO.

JEL Classification Codes: G32.

Key Words: Enterprise Risk Management, Chief Risk Officer, Hazard Model