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

We use a hazard model to examine the factors that influence firm level adoption of enterprise risk management (ERM). 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 adopt ERM. Our results suggest that ERM is being used for reasons beyond basic risk management. These other reasons include offsetting CEO risk taking incentives and seeking improved operating performance.