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Enterprise Risk Management and Default Risk : Evidence from the Banking Industry

Wilhelmsson, Anders LU and Lundqvist, Sara (2016) In Journal of Risk and Insurance
Abstract
Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk, and information risk—ultimately reducing a firm's default risk. We empirically investigate the relationship between the degree of ERM implementation and default risk in a panel data set covering 78 of the world's largest banks. We create a novel measure of the degree of ERM implementation. We find that a higher degree of ERM implementation is negatively related to the credit default swap (CDS) spread of a bank. When a rich set of control variables and fixed effects are included, a... (More)
Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk, and information risk—ultimately reducing a firm's default risk. We empirically investigate the relationship between the degree of ERM implementation and default risk in a panel data set covering 78 of the world's largest banks. We create a novel measure of the degree of ERM implementation. We find that a higher degree of ERM implementation is negatively related to the credit default swap (CDS) spread of a bank. When a rich set of control variables and fixed effects are included, a one-standard-deviation increase in the degree of ERM implementation decreases CDS spreads by 21 basis points. The degree of ERM implementation is, however, not a significant determinant of credit ratings when controls for corporate governance are included. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
epub
subject
in
Journal of Risk and Insurance
pages
31 pages
external identifiers
  • scopus:84995530862
DOI
10.1111/jori.12151
language
English
LU publication?
yes
id
0439676d-ef4e-472b-8b13-a5e3dc349cdd
date added to LUP
2016-11-14 20:47:44
date last changed
2017-02-19 04:42:26
@article{0439676d-ef4e-472b-8b13-a5e3dc349cdd,
  abstract     = {Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk, and information risk—ultimately reducing a firm's default risk. We empirically investigate the relationship between the degree of ERM implementation and default risk in a panel data set covering 78 of the world's largest banks. We create a novel measure of the degree of ERM implementation. We find that a higher degree of ERM implementation is negatively related to the credit default swap (CDS) spread of a bank. When a rich set of control variables and fixed effects are included, a one-standard-deviation increase in the degree of ERM implementation decreases CDS spreads by 21 basis points. The degree of ERM implementation is, however, not a significant determinant of credit ratings when controls for corporate governance are included.},
  author       = {Wilhelmsson, Anders and Lundqvist, Sara},
  language     = {eng},
  month        = {10},
  pages        = {31},
  series       = {Journal of Risk and Insurance},
  title        = {Enterprise Risk Management and Default Risk : Evidence from the Banking Industry},
  url          = {http://dx.doi.org/10.1111/jori.12151},
  year         = {2016},
}