Market Reactions to Enterprise Risk Management Adoption

Enterprise Risk Management (ERM) is a process that integrates all of a firm’s risks in a holistic way. Prior literature has provided mixed results as to whether ERM adds value. To reconcile the contrary strands of literature, we study stock market reactions to first public announcements of firms adopting ERM and find support for ERM value creation in years following 2005, when Standard & Poor’s (S&P) declared their ERM-related rating criteria and firm stakeholders gained greater understanding of ERM. Prior to 2005, firms experienced negative abnormal returns when announcing ERM adoptions. Additionally, we study whether insurers experienced abnormal stock market reactions to ERM-related ratings announcements from S&P and A.M. Best. We find some evidence of abnormal reactions for S&P’s announcement, but none for A.M. Best. We also find that the market rewarded ERM adopters and penalized non-adopters after November 2011 on key dates leading to the passage of the Own Risk Solvency Assessment (ORSA) Act when there was less uncertainty about it.