Enterprise risk management and firm performance: The Italian case

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.