ERM Index And Its Effects On Firm Performance:an Empirical Analysis Of The Financial Firms

The global financial crisis since2007has exposed problems and weaknesses deep in the enterprise risk management. The research concerning the risk management is gaining increasing attention. Since the middle of the1990s, the implementation of an enterprise risk management has become a new trend in enterprise management. Since financial industry is the first to propose to implement an enterprise risk management compared to other industries in China, in this paper, the empirical study of the evaluation of ERM and the effects of ERM on firm performance are based on the public information of listed financial firms with the aim to make for the lack of empirical study of domestic ERM research.Based on COSO’s ERM framework and research of Gordon et al (2009), we develop an ERM index adjusted to the actual condition of China. We study the21financial firms listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange from2008to2012. We model the effect of ERM on firm performance by panel data model both parametric and nonparametric. We find a positive relation between ERM index and ROA, a proxy for firm performance, with the significant level of0.1in parametric model. The nonparametric model gets the same results. In a word, the implementation of ERM can improve the firm performance.The results of point by point in a nonparametric panel data model show that ROA-ERMI coefficient rises when ERMI increased. The increasing of ERMI value indicates an enhanced risk management. A stronger effect of ERM on firm performance can result from the enhancement of risk management.The results worked out from the nonparametric test and panel data model show that the hiring of a Chief Risk Officer, an event frequently used to indicate the adoption of ERM in studies abroad, is not suitable in the analysis of China’s banking industry. A dummy variable can’t be a good measurement of ERM.