Quantifying financial risk management skill: a new measure and empirical validation

I propose a novel measure of financial risk management skill (FRMS) that captures a five-level ability to improve firm outcomes by effectively managing internal firm-level operations and external systematic and environmental factors, as well as biodiversity risk exposures. My measure is constructed by aggregating standardised residuals from five distinct performance models, each controlling for firm- and risk-specific attributes, resulting in a composite index that isolates the value-added component of managerial skill in risk-sensitive domains. I validate FRMS through a battery of tests: it loads significantly onto a single latent factor in confirmatory factor analysis (CFA), correlates strongly with established managerial ability scores, and predicts future firm performance proxied by return on assets (ROA), Tobin's Q, and returns. Robustness checks confirm the stability of FRMS across performance quantiles, economic cycles, and industry risk profiles. Additionally, I show that FRMS offers incremental explanatory power beyond traditional managerial ability and interacts meaningfully with it in driving performance.