Enterprise Risk Management, Earnings Predictability and the Cost of Debt

The extant academic literature considers enterprise risk management (ERM) to be the fundamental paradigm for managing the portfolio of risks confronting organizations. However, there is debate as to whether ERM actually enhances stakeholder value. This study investigates whether ERM is associated with increased earnings predictability and a lower risk of firm failure, two theoretical predications regarding ERM's impact on stakeholder value. My research utilizes the Security and Exchange Commission's (SEC) enhanced proxy statement disclosures as of February 28th, 2010 to measure ERM performance. Additionally, in order to quantify the operational construct, textual analysis is performed to develop a measure of ERM performance to be used in econometric analyses. The analyses presented in this paper investigate whether key predicted benefits of ERM are observable. Results support the proposition that ERM is associated with increased earnings predictability. Specifically, earnings and accruals are found to be more persistent for firms with better ERM performance. Additionally, analysts' earnings forecasts are more accurate in the presence of enhanced ERM performance. Results are inconclusive with regards to ERM's ability to influence the risk of firm failure during this study's sample period (i.e., 2007-2009). One explanation for this departure, the economic volatility during the financial crisis of 2008-2009, may make it difficult to empirically detect the relationship between ERM performance and the risk of firm failure.

Name thesis:degree_name

Ph. D.

Level thesis:degree_level

doctoral

Discipline thesis:degree_discipline

Accounting and Information Systems

Department dc:contributor.department

Accounting and Information Systems

Grantor dc:publisher

Virginia Tech

Year dc:date.issued

2012

Author dc:creator

• Leece, Ryan Don

Chair dc:contributor.committeechair

• Maher, John J.

Committee members dc:contributor.committeemember

• Brown, Robert M.
• Brozovsky, John A.
• Ince, Ozgur S.
• Oler, Mitchell J.

• Textual Analysis
• Analysts' Forecasts
• Earnings Predictability
• Risk Management

Statement dc:rights

• In Copyright

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Dc Identifier Other

etd-03192012-083600

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/37506