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Enterprise Risk Management and the Cost of Capital

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  • Thomas R. Berry†Stölzle
  • Jianren Xu

Abstract

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. We restrict our analysis to the U.S. insurance industry to control for unobservable differences in business models and risk exposures across industries. We simultaneously model firms' adoption of ERM and the effect of ERM on the cost of capital. We find that ERM adoption significantly reduces firm's cost of capital. Our results suggest that cost of capital benefits are one answer to the question how ERM can create value.

Suggested Citation

  • Thomas R. Berry†Stölzle & Jianren Xu, 2018. "Enterprise Risk Management and the Cost of Capital," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(1), pages 159-201, March.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:1:p:159-201
    DOI: 10.1111/jori.12152
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