This paper investigates whether a relationship exists between the extent of implementation of enterprise risk management (ERM) systems and the performance of Italian listed companies. While many contributions in the literature focus on the determinants of ERM adoption and use one-dimensional feature to proxy for ERM implementation, we detect the consequences of ERM implementation and capture a variety of features to measure the sophistication of the ERM system. The results show that firms with advanced levels of ERM implementation present higher performance, both as financial performance and market evaluation. Additional tests also corroborate the expectation that effective ERM systems lead to higher performance by reducing risk exposure and that reverse causality between ERM and performance is not present in the short term. The study provides a twofold contribution to the ERM literature. First, it introduces new and more complete measures for ERM implementation, concerning not only corporate governance bodies dedicated to risk management, but also the characteristics of the risk assessment process. Moreover, it provides evidence of a positive relationship between ERM implementation and firm performance in an under-investigated context such as Italy.
International literature on enterprise risk management (ERM) argues that organisations may improve their performance by adopting a holistic approach to risk management (RM). The introduction and development of ERM systems is deemed to reduce direct and indirect costs of financial distress and earnings variability, as well as negative surprises in financial markets. Moreover, it may improve the decision-making processes to select the best investment opportunities. As a consequence, ERM may favour the increase of firm value (a.o., Beasley, Pagach, & Warr, 2008; Beasley, Clune, & Hermanson, 2005; Ellul & Yerramilli, 2013; Hoyt & Liebenberg, 2011; Nocco & Stulz, 2006; Paape & Spekle, 2012 ). Notwithstanding such considerations, empirical evidence on the relationship between ERM and performance is still limited (Farrell & Gallagher, 2014; McShane, Nair, & Rustambekov, 2011). Most ERM studies investigate the relationship between the determinants and quality of ERM systems, while only a few concentrate on the consequences of ERM on firm financial and market performance (Baxter, Bedard, Hoitash, & Yezegel, 2013; Hoyt & Liebenberg, 2011; McShane et al., 2011). One reason behind this lack of empirical evidence is the difficulty in explaining the relationship between ERM and firm performance, as a direct relation or simply a consequence of risk reduction (Ellul & Yerramilli, 2013; Nocco & Stulz, 2006). Although initial studies signal a positive relationship between ERM adoption and firm performance, so far the context of investigation has been mainly confined to the US. Little is known about ERM in European countries, such as Italy, where the attention on RM practices by corporate governance (CG) codes has increased considerably in recent years, especially following big financial scandals like Parmalat and Cirio (Enriques & Volpin, 2007; Melis, 2005). As Italian firms have significantly different characteristics compared to US firms, the results could advance the knowledge of the international community on ERM in new contexts. First of all, Italian public companies are a minority in respect to the large majority of small and medium private firms, usually family owned and characterized by close ownership (Vigano & Mattessich, 2007; Zattoni, 1999). As owners exert stringent control over the company they tend to avoid formal ERM practices. Secondly, the Italian capital market is under-developed compared to the US one and failed in becoming the main source of capital for Italian companies (Zambon, 2002).1 Therefore, it is doubtful whether Italian investors are capable of pricing the ERM adoption, thus determining a change in firms' market value. Thirdly, Italy constitutes a good context to study the implications of RM enforcement, as only in 2011 the CG code stressed the importance of RM practices. Finally, despite such differences, Italy was hit by similar financial scandals as the US and since early 2000 it was subject to the tightening of CG regulation. Recently, initial qualitative studies focused on the Italian context have brought to attention the importance of experts’ ability for the ERM functioning and for its change (Arena, Arnaboldi, & Azzone, 2010, 2011; Giovannoni, Quarchioni, & Riccaboni, 2016), the integration of risk management in CG (Florio & Leoni, 2013), and the way ERM allows credit cooperative banks to achieve both economic and social performance (Caldarelli, Fiondella, Maffei, & Zagaria, 2016).