Enterprise risk management implementation disclosure and firm value : the role of ownership structure and firm reputation

Abstract

This study aims to examine the relationship between Enterprise Risk Management (ERM) implementation disclosure and firm value and the impact of ownership structure and firm reputation on that relationship. Amid theoretical predictions and repeated calls for ERM to increase firm value, prior studies on ERM and firm value have mainly focused on the direct effect of ERM adoption/implementation on firm value. However, the implications of ERM on firm results tend to be dependent on firm characteristics and the benefit gained from the ERM system. Since ownership structure becomes more prominent in emerging markets like Malaysia, and the importance of having a good reputation in increasing market confidence, thus both factors are expected to influence the association between ERM implementation disclosure and firm value. This study proves that ERM implementation disclosure can increase firm value among publicly listed firms in Malaysia from 2016 to 2019. The results suggest that information concerning ERM practices in terms of the governance, performance (process), strategy, and communication approach provides value-relevance information to the shareholders and creditors. Further, this study shows that family ownership negatively moderates the relationship between ERM disclosure and firm value, indicating the entrenchment effect of family ownership when a) family owners sit on the boards, and b) have control over ownership. In contrast, institutional investor's ownership positively moderates the relationship between ERM disclosure and firm value, demonstrating the alignment effect. Hence, it implies that ERM disclosure's value relevance depends on different types of ownership structures due to the associated monitoring and control behaviour by the owners. Moreover, this study exhibits that the firm reputation mediates the positive association between ERM disclosure and firm value. The ERM disclosure can provide a positive signal in terms of a respectable reputation, influencing investor confidence by enhancing the firm's value. The findings of this study contribute to the growing body of knowledge in ERM about the importance of more transparent ERM implementation, the potential effect of owners' influence on the value relevance of ERM information, and the strategic value of ERM through firm reputation. Future research may consider extending the items in the ERM implementation disclosure index, using different approaches to measure firm reputation, examining other corporate governance mechanisms, and exploring other institutional settings.