Enterprise Risk Management Practices in Slovenia and Their Impact on Performance

Abstract

Article deals with perceived corporate risk management determinants of Slovene firms. There are quite some theoretical explanations of reasonable behavior of corporate financial managers in financial literature. I briefly introduce maximization of wealth theory (Smith and Stulz, 1985; Froot, Scharfstein and Stein, 1993) and agency theory (Tufano, 1998) and point to different techniques firms can use to better decrease various exposures. After the introduction reach empirics should provide deeper insights into this challenging topic. In the first empirical part I follow some aspects of well-cited article of Graham and Harvey (2001) dealing with modern corporate finance practices of US firms. Paper reveals the determinants of different types of risk Slovene firms consider as crucial. In the second empirical part, it tests hypotheses about performance of 137 surveyed Slovene firms differentiated by risk management practices. Those have been uniquely profiled using the answers acquired in the survey of corporate finance practices of Slovene Institute of Auditors and Research Center of Faculty of Economics. Generally, surveyed Slovene firms do not frequently use CAPM as a common base for risk premium determination. Differences are not significant between groups of small and large firms. However, large surveyed firms pay more attention to information about exchange rate movements, which also holds true in the case of the firms recording substantial proportion of foreign sales. Analysis sheds light on the degree of leverage and firms' behavior. Levels of debt are dependent upon degree of operating leverage. However, total debt to a much lesser extent than long-term debt only. This effect comes at least to some extent to a surprise, since during transition short-term debt served as close substitute for long-term debt of Slovene firms and had being systematically rolled over. Relation is not significantly stronger by firms that are more aware of the need to employ risk management techniques. However, I argue that more risk aware firms show better financial performance, manage assets more efficiently, reach higher productivity and liquidity levels, and use more debt. That means Slovene corporate reality rather supports wealth maximization theory. What seems to be more of a puzzle are significant differences with counterintuitive direction by efficiency ratios mean comparisons. Firms with more sophistication in the area of risk management have lower total assets- and fixed assets turnover, and employ more assets per employee. Even though efficiency rises with risk awareness, many firms seem to be classified as most risk aware because of the type of assets. The reason in fact comes from the need of more capital-intense firms to better deal with risks.