Does Enterprise Risk Management Deliver Strategic Value? Evidence from Mergers and Acquisitions

While prior literature establishes that the ultimate purpose of enterprise risk management (ERM) is to improve the quality of strategic decisions, empirical evidence on whether ERM delivers this strategic value remains limited. We examine this question in the context of mergers and acquisitions (M&As), one of the most consequential and highest risk strategic decisions that firms make. Using Standard & Poor’s (S&P) ERM quality ratings for U.S. insurers from 2007 to 2017, we find that at the extensive margin, ERM quality is negatively associated with merger engagement and the number of mergers. Conditional on engaging in a merger, ERM quality is positively associated with the probability of deal completion in most specifications and is significantly associated with superior postmerger stock performance. These findings hold under instrumental variables estimation and entropy balancing. Our results provide evidence that the benefits of ERM extend beyond downside risk reduction to the quality of high-stakes strategic investments.