Enterprise Risk Management and the Cost of Capital
- Author: Statistics Views, Thomas R. Berry-Stölzle and Jianren Xu
- Date: 11 January 2017
Free access has been given to a new article from the Journal of Risk and Insurance.
Enterprise risk management (ERM) is a process that manages all risks in an integrated, holistic fashion by controlling and coordinating any offsetting risks across the enterprise. This research investigates whether the adoption of the ERM approach affects firms' cost of equity capital. Authors Thomas R. Berry-Stölzle and Jianren Xu restrict their analysis to the U.S. insurance industry to control for unobservable differences in business models and risk exposures across industries. They simultaneously model firms' adoption of ERM and the effect of ERM on the cost of capital. They find that ERM adoption significantly reduces firm's cost of capital. Their results suggest that cost of capital benefits are one answer to the question how ERM can create value.
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Thomas R. Berry-Stölzle and Jianren Xu