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Enterprise Risk Management and Shareholders Value Assignment

Question: The individual and joint effects of enterprise risk management (ERM) and risk disclosure on shareholder value. The purpose of this research project is to improve our understanding of shareholder value by examining to what extent enterprise risk management and risk disclosure based on content analysis of Management Discussion and Analysis.

Solution:  Enterprise Risk Management and Risk Disclosure Impact on Shareholders Value

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1 Executive summary

The given paper analyzes the impact of enterprise risk management as well as risk disclosure on shareholders' value with controlling the variable effect of sales, ROA, leverage and firm size of 200 companies. The data collected from 200 listed companies in S & P through annual reports and the company's website. The objectives, purpose, and method to be sued discussed in the paper. The analysis portion indicates that the controlling variables have a strong influence on shareholders' value and maximizing wealth. The calculated values are given below in the appendix.

Enterprise Risk Management and Shareholders Value

2 Introduction

ERM is a fundamental approach and process regarding the management of risk activities (Bromiley, McShane, Nair, & Rustambekov, 2015). The process of risk management is fundamental and significant for small as well as large scale organization. It cannot be neglect that the failure of managing risks strategies for both private and public lead to diminishing market value and lack of shareholder value. When a corporation does not manage the risk activities, it badly affects the shareholder value. The shareholder's interest, company growth, as well as executive management activities significantly related to risk management. The better when a firm manages the risk activities, the positively it lead to shareholders value and vice versa. In short, the process of ERM is very significant for a corporation.

2.1 ERM
Enterprise risk managementwhich is commonly known as ‘ERM'. Generally, ERM is the process of implement the activities to manage and reduce the risks (Knechel & Salterio, 2016). ERM is a significant process of planning, organizing, leading as well as controlling the activities of a company. The companies under the ERM process identify the possible risks, then identify and control the risk mitigation activities for increasing the firm value. As the firm's value is critically linked with shareholder's value; therefore, the RM activities positively affect the shareholders' value. Further, the ERM process is vital for companies to enhance growth as well as minimize the risks. (Bohnert, Gatzert, Hoyt, & Lechner, 2019). The large and small scale organizations, implement the risk management activities under the practice, constituteas a major change management program. There are some ERM practices that an organization implement in order to increase the firm value and enhance growth.

Further, the main activities under the enterprise risk management process are significant. The risk appetite and philosophy for the organization is being set from the commitment as well as behavior. Moreover, the establishment of a risk management strategy has also a critical role to implement the process.

Developing risk management activities and structure is important to determine the ERM integration into an organization (Kravet & Muslu, 2013). As, it is well known that most significant risks for a firm like a decrease in sales, threat of new entrant, a decrease in demand and other lack of business process. These possible risk can significantly affect the growth of a company. These risks also affect the financial position or shareholders value in the negative or positive term. Therefore, the management of identified risks is very important for an organization to succeed. It directly affects the position and liquidity position of a firm.

The ERM provides an accurate framework for the risk management that based on properly identify the specific events in order to achieve the organization's objectives. This is an assessment if magnitude and likelihood of the impact, identify the response and monitory based strategies. In order to make an effective risk management, all the business enterprises create and protect the value of the stakeholders like regulators, customers, owners, society and owners.

Additionally, the process of ERM is important to build a risk-aware culture in the company with the help of appropriate training and education (Toft & Reynolds, 2016). At the same time, the process of risk management activities has animportant relationship with the growth and profit of firm. The risk management activities of a firm are also important to develop the risk response process as well as reporting methods internally and externally. The risk management activities basically as develop and implement by top-level management. The CEO of a firm has a key role and responsibility to manage the capabilities (Huq, Chowdhury, & Klassen, 2016). It is important to discuss that the chief executive officer of a firm has a key role and responsibility to access the organization risk management capabilities that possibly lead to major changes as well as initiatives.

2.2 Purpose and objectives

It has discussed above that ERM and risk disclosure has a significant relationship with shareholder's value and growth. The goal of the paper is to analyze and identify the individual and joint effects of enterprise risk management activities with shareholders value. There is a greater impact of risk disclosure activities on shareholder's value and interests.That is why the paper consists of determining and analyze how efficiently and effectively the risk management related activities that affect the shareholder's value.

Additionally, the paper consistsof analyzing the impact of risk management activities on firm's shareholder interest through the involvement of controlling variables such as firm size, growth, and return on assets, leverage, sales, firm size,and industry. The process of identifying the risks is crucial for a firm in terms of identifying and analyzing the risk management activities (Peters & Taylor, 2017). Further, the process of identifying risk management activities are also important and crucial to identify the positive impact on sales.

There is a positiveand broader relationship between sales and risk management activities. The more small and large scale organization identify the risk activities, the higher the sales of a company. Such as, when a company identifies the risks such as the threat of new entrant, the companies make effective strategies to overcome these risks and as a result, the sales and profit of the company increased. In short, the primary objective and goal of the paper are to critically analyze the relationship of risk management activities with shareholder's value in an as effective manner.

2.3 Shareholder's value

Commonly, the value of shareholder is the maximum extent or business term that implies the effective measure of a success of the company (Okoye, Odum, & Odum, 2017). The shareholders' interests and value areprimarily important for a company in terms of increasingprofit and value. The following paper has discussed the role of shareholders value in terms of enterprise risk management. It has a crucial role within a company for the management of the company. The shareholders' value also has a crucial relationship with company management and activities (Soltani & Maupetit, 2015). The higher is the shareholders' value of a company, the better is the management of that company and vice versa.

In case of ERM framework, there are many specific approaches in order to effectively indenting, evaluate, respond and then monitor the opportunities and risk related factors, either external and internal environment which mostly faced by the enterprise. There are many risk response based strategies in order to identify and analyzed the specific risk. Like the first one is based on Avoidance, where exiting activities give a proper rise torisk, the second one is reduction phase, where taking action to reduce the impact of the related risk. The third one is an alternative Actions, where management decide and consider other feasible steps to overcome the risks and the fourth one is to insure and share, where sharing a risk factors with proper financing. The last one is to accept like no action is to be taken, because of cost benefit based decision.

Shareholder interests and value increase through risk management activities through the enhanceddecision-making process. The managers, first of all, analyze the possible risks. Then, the managers protect and build the shareholders' value through enhanced decision making. The enhanced decision-making process integrates the risks and buildsinvestor confidence.

2.4 Controlling influence variable
The risk management activities of a firm also are influenced by different factors that also be known as the controlling variable. The controlling variables are given below,
• ROA
• Sales
• leverage ratio
• Firm size and growth

ROA has a significant relationship with risk management activities (Goetz, Laeven, & Levine, 2016). The higher is the return on assets, the effecta company can manage the risk in daily operations. The firm size, equity and leverage ratios are also other controlling variables that have a significant relationship with risk management activities for a firm.

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3 Methodology

The data collected through secondary sources such as different websites and company position. The data regarding the return on assets, firm size, equity, leverage ratios, as well as net sales of the companies collected through secondary sources.

The major sources for the data collection of the companies are companies own websites, annual reports, and other web pages of each company - the data collected forthe year 2015. The major data collected is a return on assets percentage, leverage ratio percentage and sales value of 2015. Further, the secondary research method has helped to identify and analyze the data. There are several advantages of secondary research that is being used. The secondary research method technique is significant due to the ease of access (Bryman, 2016). The data can easily get collected through the use of secondary sources because of the data are already available on the internet. At the same time, the secondary data sources are important because these are cost-effective as well as time-effective. The individuals do not need to collect the data each of the company. It can easily be extracted and collect through financial statements and annual reports. That is how the secondary research sources save time as well asthe cost to conduct research.

Further, the secondary research techniques are significant because it may help to clarify the research questions and significance in detail. With the help of secondary research technique, the researcher can easily collect and analyze the data (Hair Jr, Wolfinbarger, Money, Samouel, & Page, 2015). Moreover, there is the accuracy of data when it is collected through the secondary method. The data is usually accurate because it has been collected through the company'soriginal website or annual reports. There are no chances of default or mistakes in data. Therefore, the researchers used the secondary data based collection technique to collect the data because it is cost and time effective. Basis of primary research is another biggest advantage of secondary research method. The data which is collected from any secondary sources helps to boost the effectiveness of the primary research based data. The secondary data of this document can also gathered on the bases on hypothesis testing and technique.

The random sampling technique has been used to collect the data of the companies. There isa total of 200 companies selected through S & P of 1500 companies' index. The financial and other industrial companies do not includein sample companies data - the companies selected on a random basis. Mainly, the simple random sampling technique used when chances are a likelihoodof being selected in a sample (Walliman, 2017). Commonly, there are various advantages of simple random sampling technique. One of the primary advantage of simple random sampling technique that it is a fair method when it applied appropriately to reduce any type of business. The companies selected on a random basis,therefore, to reduce the biases. Moreover, the simple random sampling technique does not need prior knowledgeofbeing data collection measures.

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4 Examination and analysis

The collected data of the 200 listed companies shows that risk management activities significantly influence the shareholders' value. Here, it is important to discuss the concept of risk disclosure. The concept of risk disclosure is different from ERM. The ERM is the process of managing and analyses the risk mitigation activities. While the risk disclosure demonstrates the effects of risk management activities in the future period. The upper management identifies and evaluates the risk and made an influential decision. However, the decision-making process should be efficient and effective. To make the decision effect management has to go through from the SPSS analysis by taking any of its one items as dependent and other as independent. From the data of 200 companies, the effect of risk on the shareholder's value is going to determine.

4.1 Analysis of the firm's data

Regression

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.009a

.000

-.015

79678.386

a. Predictors: (Constant), Leverage, ROA, % Sales growth

b. Dependent Variable: Shareholder's value (Dependent Variable)

In this analysis, Risk management is taken as an independent variable of this research and the shareholder values of a company is considered as an independent variable. In the analysis of regression, the regression is a method of this statistical analysis that helps in examining the relationship between the risk disclosure and shareholders' value. According to this analysis, the relationship between the independent and dependent variables which is 0.009, which means the low level of relationship exists between risk and the value of shareholders. R-squared is zero, means the variance proportion between the dependent variable and the independent variable, which is zero. As in the perspective of adjusted R squared, it increases when there are unexpected improvements in the model, while in the analysis adjusted R squared is negative which means our independent variable is insignificant. As a concern with the standard error, the value is too high. This means the situation is out of control in the companies because they are taking too much risk that affects the value of the Shareholders.

ANOVA

ANOVA

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

89714665.235

3

29904888.412

.005

1.000b

Residual

1231637156628.091

194

6348645137.258

 

 

Total

1231726871293.326

197

 

 

 

a. Dependent Variable: Shareholder's value (Dependent Variable)

b. Predictors: (Constant), Leverage, ROA, % Sales growth

a. Dependent Variable: Shareholder's value (Dependent Variable)

b. Predictors: (Constant), Leverage, ROA, % Sales growth

In the Anova test analysis, the variance analysis contains the calculations and tell about the variability and significant level of the regression model. The total variance of the sum of square in regression and residuals are high in range, which means squared standard deviation from its original mean is higher. DF represents the total degree of freedom. The value of the mean square is also higher. In the end, the F ratio denotes two mean square values. When the null hypothesis is true, the value of F will close to 1. According to this summary, the value of F is one which means the null hypothesis will be accepted.

Coefficients

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

Correlations

Collinearity Statistics

B

Std. Error

Beta

Zero-order

Partial

Part

Tolerance

VIF

1

(Constant)

7758.919

5710.367

 

1.359

.176

 

 

 

 

 

ROA

-143.271

2450.210

-.004

-.058

.953

-.004

-.004

-.004

1.000

1.000

% Sales growth

-.005

.049

-.007

-.092

.927

-.007

-.007

-.007

1.000

1.000

Leverage

-.190

3.937

-.003

-.048

.962

-.003

-.003

-.003

1.000

1.000

a. Dependent Variable: Shareholder's value (Dependent Variable)

The high ROA value means the company has more capital and profit as compared to shareholders' equity (Vatavu, 2015). At the same time, some companies have negative ROA which indicates that the company does not earn profit from the asset. As compared to the analysis, the value of the ROA is negative. The negative ROA value of some of the companies indicates that there is a negative relationship between shareholder value and return on assets. The companies who have low ROA, it means that the company does not have a proper risk management process. The negative ROA value indicates that the process of ERM is low. On the other hand, the companies who have a high ROA percentage, it means that company upper management has strong risk management.

According to a standardized and unstandardized coefficient, the standard error is high indicates that companies are bearing more risk and situations are not in control. The sales have a controlling influence on the risk management process a shareholder's value. The sales of a company have a fundamental relationship with the firm's shareholders' value. The higher is the sales, means the company has positive growth, and the positive growth means the company services to its shareholders. According to analysis, sales growth is negative which means companies have no influence on their risk management and bearing a higher rate of risk. Companies that have lower sales or negative sales affect the shareholders' value and decision-making process. As the data of 2015, the majority of companies are bearing loss. There are chances of some external factors that influence the performance of the companies in 2015.

Leverage ratio is another primary factor behind the shareholders' value and risk management process (DePamphilis, 2019). As leverage is another name of debt and obligations of the company, therefore the leverage percentage indicates the total debt other than equity. The standard value of the leverage ratio of a company is 0.5 or less than that. According to a standard value, the leverage ratio indicates the debt other than equity that a company takes from different firms to fulfil their requirements. A good capital structure of a company is based on 50:50% rule. It means that a company should have a mix of debt and equity with equal or less percentage. E.g. a company capital structure illustrate that a company should raise the capital through equity resources rather than debt. The leverage ratio shows that there should be a percentage of debt than equity. The equity percentage should be higher than the debt. As the majority of the companies have leverage ratio is negative, it means they are not using debt to grow their sales and performance level. The standard value of the significant level is 0.5. In this analysis the significant value is high, but the ROA, sales growth and leverage are negative. There must be some external factors in the year 2015 that affects the performance of the companies badly.

Collinearity Diagnostics

Model

Dimension

Eigenvalue

Condition Index

Variance Proportions

(Constant)

ROA

% Sales growth

Leverage

1

1

1.131

1.000

.43

.03

.13

.29

2

1.002

1.062

.00

.30

.56

.13

3

.994

1.067

.00

.65

.14

.21

4

.872

1.139

.57

.01

.18

.37

a. Dependent Variable: Shareholder's value (Dependent Variable)

Residuals Statistics

 

Minimum

Maximum

Mean

Std. Deviation

N

 

Predicted Value

422.40

11506.94

7684.01

674.837

198

 

Residual

-571953.750

923808.375

.000

79069.370

198

 

Std. Predicted Value

-10.761

5.665

.000

1.000

198

 

Std. Residual

-7.178

11.594

.000

.992

198

 

a. Dependent Variable: Shareholder's value (Dependent Variable)

 

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a. Dependent Variable: Shareholder's value (Dependent Variable)

In the analysis of collinearity among the variance proportions, the values of ROA, sales growth and leverage are positive. As the value of leverage is higher the sales growth may increase but decrease the value of ROA. This means at this state, taking leverage for the companies was a bad decision because of external factors. Where in the analysis, the leverage rate is low, there is higher growth, and ROA is also maximum. At that time, if the phase of depression the majority of companies go with this concept of anti-leverage. The following calculated results indicate that lower ROA negatively affect the shareholder's interests due to the increasing percentage of profit. It means majority of companies have capital and profit as compared to shareholders equity in year 2015 (Vatavu, 2015).

Descriptive Statistics

 

Mean

Std. Deviation

N

ROA

.06

2.311

199

% Sales growth

8100.628467

114468.0361300

200

Leverage

149.94221%

1434.609246%

200

Shareholder's value (Dependent Variable)

8007.55

78684.273

201

As in the descriptive analysis, the number of observations is 200. Mean value of ROA, sales growth, leverage and the shareholder's value in maximum. The deviation from its original mean is also higher. It is analyzed that the companies with low higher leverage ratio have a negative relationship with shareholders value and interests. For instance, NCR Corporation has a high leverage ratio which indicate that the company has high debt and obligations other than equity. In resulting high leverage ratio, the companies cannot invest in new groups, activities, and operations. The high leverage ratio indicates that the companies have more obligations, while the higher obligations lead to fewer shareholder interests (Muritala, 2018).

Correlations

 

ROA

% Sales growth

Leverage

Shareholder's value (Dependent Variable)

ROA

Pearson Correlation

1

-.001

.005

-.004

Sig. (2-tailed)

 

.991

.939

.953

Sum of Squares and Cross-products

1057.518

-42357.156

3575.617

-152001.587

Covariance

5.341

-213.925

18.059

-771.582

N

199

199

199

198

% Sales growth

Pearson Correlation

-.001

1

-.007

-.007

Sig. (2-tailed)

.991

 

.920

.927

Sum of Squares and Cross-products

-42357.156

2607483327796.750

-232465146.294

-11692850492.880

Covariance

-213.925

13102931295.461

-1168166.564

-59054800.469

N

199

200

200

199

Leverage

Pearson Correlation

.005

-.007

1

-.003

Sig. (2-tailed)

.939

.920

 

.962

Sum of Squares and Cross-products

3575.617

-232465146.294

409562634.053

-76215909.319

Covariance

18.059

-1168166.564

2058103.689

-384928.835

N

199

200

200

199

Shareholder's value (Dependent Variable)

Pearson Correlation

-.004

-.007

-.003

1

Sig. (2-tailed)

.953

.927

.962

 

Sum of Squares and Cross-products

-152001.587

-11692850492.880

-76215909.319

1238242979137.529

Covariance

-771.582

-59054800.469

-384928.835

6191214895.688

N

198

199

199

201

As in the concept of correlations, ROA is co-related with the growth of sales, leverage and shareholders value. ROA is correlated with leverage when it increases; it increases the value of leverage. The sales growth is correlated with shareholder's value, as one decrease the other will also decrease. As well as other multiple companies that had the lowest sales in the year 2015. The lower sales affect risk management and shareholders' interest in a company. In fact, bad management affects the sales and growth of a company in a negative way. Ineffective management has a clear indicator of lower sales. The lowest sales further lead to ineffective shareholders value. It is important to mention that the decrease in sales directly affects the growth of a company. If a company has low sales, it means the company cannot pay to its shareholders in the form of a dividend. The higher will be the sales of a firm, the more company will give their shareholders in the form of a dividend.

The relationship between sales and shareholders' value examine through dividend amount. The companies who earn maximum sales, they give a maximum dividend to their shareholders. The dividend amount further leads to shareholders wealth and interests. This is how the high sales of a company lead to a significant and positive relationship with shareholders. The sale of 200 companies demonstrates that companies with higher sales can easily maintain the relationship with shareholders. Similarly, the companies having low sales lea to insignificant shareholders' value and wealth.

Nonparametric Correlations

Correlations

 

ROA

% Sales growth

Leverage

Shareholder's value (Dependent Variable)

Kendall's tau_b

ROA

Correlation Coefficient

1.000

-.036

.004

-.017

Sig. (2-tailed)

.

.447

.941

.723

N

199

199

199

198

% Sales growth

Correlation Coefficient

-.036

1.000

-.067

.054

Sig. (2-tailed)

.447

.

.163

.255

N

199

200

200

199

Leverage

Correlation Coefficient

.004

-.067

1.000

-.033

Sig. (2-tailed)

.941

.163

.

.488

N

199

200

200

199

Shareholder's value (Dependent Variable)

Correlation Coefficient

-.017

.054

-.033

1.000

Sig. (2-tailed)

.723

.255

.488

.

N

198

199

199

201

A two-tailed analysis is used for the two-sided distribution of the area. This analysis is used to test the null hypothesis. Using the leverage in terms of risk will effect on ROA. In two-tailed, if the ROA is higher than leverage, it means ROA is significantly less than leverage. When risk as an independent variable is greater than the value of shareholder's which means after applying a two-tailed test, the risk will significantly less than shareholder's value.

4.2 Examine the extent to which enterprise risk management individually or jointly affect the shareholder's value

With the help of ratios, sales,and firms equity, it is analyzed that up to the maximum extent the risk management activities and process positively affect the shareholders' value. The above analysis indicates that both ERM and risk disclosure affect the shareholder's value with the control ofvarious factors such as ROA, sales, firm size and leverage ratio on shareholders' value. Some companieshave a positive relationship with shareholder's value and enterprise risk management while some havean insignificant negative relationship with shareholders value and influence of control variables.

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5 Recommendations and conclusion

The shareholders play a significant role in a firm. The enterprise risk management process allows and analyzes a company regarding the identification of risks. According to the above analysis, it comes to the knowledge that the sales have a significant relationship with shareholders value of a company. The higher are the sales, the more effective a company can manage the activities and process of the risk. Therefore, it is recommended to various companies that they must focus on increasing the sales or revenue. The higher will be the sales, the more will cash in within the company, and the maximum will company spends on its shareholders.

Secondly, debt or obligations also has a significant relationship with shareholders value. The companies should majorly focus on raise equity rather than debts. The more debt of a company has, the less will be the shareholder value and interest. Therefore, from 200 companies, the companies who have high debt percentage should be focuses on minimize the debt obligations.

Thirdly, the companies should really try to focus on risk management activities for the identification and analysis of possible risks.

The whole paper consists of ERM, risk disclosure,andshareholders' value. The paper intends to identify and analyze the role of ERM in maximizing the shareholder's wealth. The controlling variables in the topic are ROA, sales, leverage, and equity. The data collected through secondary sources such as annual reports and companies' official websites. Moreover, the analysis indicates that there is a significant and effective relationship between ERM on shareholders' value. The companies that can easily determine the ways and identify the possible risk, they have maximum shareholders wealth and vice versa.

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