Enterprise risk management or ERM is fast ascending the corporate agenda
globally. Its relevancy and popularity as a management technique are abetted by the
changing business practices and burgeoning regulatory requirements on risk
management. ERM is defined as the process of identifying and analyzing risk from
an integrated, company-wide perspective in a structured and disciplined approach in
aligmng strategy, processes, people, technology and knowledge with a purpose of
evaluating and managing the uncertainties facing the enterprise as it creates value.
ERM essentially lays concern for managing the firm's specific risk apart from the
systematic risks.
However, the neo-classical finance theory (NCFT) postulates that managing
firm-specific risk is irrelevant. Nonetheless, this notion is in stark contrast to the
phenomenon of increased acceptance of ERM by industry practitioners. As such,
this thesis attempts to propose an ERM implementation framework to theorize a
model that captures the causal relationships of the risks that are strategically
associated with the firms' business performance and the cost of capital, e.g. risk
premium.
This thesis highlights the notion of managing firms' unsystematic (specific)
risk via an ERM implementation framework that leads to the enhancement of
shareholders' value. The mechanism through which the firms' value enhancement
takes place is theorized by a strategic conceptualization of risk premium model. The
model cites managing the firm's three classes of unsystematic risk, namely tactical
risk, strategic risk, and normative risk. The specific aims of this thesis are fourfold:
(i) to examine the depth of penetration of ERM practices among the public listed companies in Malaysia; (ii) to examine how an effective impiementation process of
ERM will bring about value-enhancing outcome to Malaysia public listed companies
(PLCs); (iii) to analyze the value proposition hypotheses of corporate risk
management as the determinants for ERM practices; and (iv) to investigate the
validity of the theorized value creation transmission mechanism of the proposed
ERM framework via the strategic conceptualization of risk premium model.
The data is collected through questionnaires survey from 128 PLCs on the
Malaysian stock exchange. Variables in the questionnaire are measured in 5-point
Likert's scale. The analyses encompass factor analysis and structural equation
modeling (SEM). Outcomes of the factor analysis provide inputs (the measurement
model) for the SEM analysis. The SEM validates the theorized causal relationships
among the three constructs, i.e. ERM implementation challenge, ERM
implementation intensity, andperceivedERM benefitmeasures: The modified model
incorporates a second-order factor model which presents improved overall
goodness-of-fit values than the proposed model. Apart from that, the analytic also
comprises bivariate correlation analysis of hypotheses testing in relation to the
various aspects of: (i) the value maximization theory of ERM practices; and (ii)
the value creation transmission mechanism of the proposed ERM implementation
framework.
The analysis results conclude the following: (i) that all causal relationships
(structural model) under SEM examination indicate significant parameters; (ii) that
ERM implementation has significant positive associations with value maximization
theories of risk management; (iii) that ERM implementation has significant positive effects in reducing the firm's tactical and strategic risks with the consequence of
lowering the firm's risk premium