The Value of Enterprise Risk Management

Abstract Enterprise risk management (ERM) has been the topic of increased media attention in recent years. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We simultaneously model the determinants of ERM and the effect of ERM on firm value. We estimate the effect of ERM on Tobin's Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium of roughly 20 percent is statistically and economically significant.