Abstract
This study investigates the relationship between Enterprise Risk Management adoption and implementation, and the performance of banks using a sample of four out of the seven Strategically Important Banks (SIB) listed on the Nigerian Stock Exchange covering the period from 2005 q1 to 2015 q2. In this study, we determined a measure for Enterprise Risk Management (ERM) adoption or implementation (ERM index) using an integrated Enterprise Risk Management measurement model for the banking sector suggested by Soliman and Mukhtar (2017). A time series Johansen’s cointegration test was used to obtain evidence of the long-term association between ERM and performance, while Vector Error Correction Model (VECM) analysis was performed to gather evidence of causality relationship between ERM and performance. Finally, Generalized Impulse Response Function was used to obtain evidence of how performance responds to the introduction of a shock on Enterprise Risk Management. This study makes significant contributions to the existing body of knowledge, as it yields the first Enterprise Risk Management-performance-based empirical results that indicate a long-term relationship, causation effects, in addition to responding to performance ERM.
Highlights
In recent years, Enterprise Risk Management (ERM) as a discipline has received unprecedented interest and international attention (Arena et al, 2010)
We found significant empirical evidence that ERM does affect the performance of Nigerian banks in both the short and long terms
The study has provided empirical evidence that ERM has a causation effect on the performance of Nigerian banks and evidence was obtained that the performance of Nigerians banks responds positively to a positive shock on ERM
Summary
Enterprise Risk Management (ERM) as a discipline has received unprecedented interest and international attention (Arena et al, 2010). We note that the study undertaken by Pagach and Warr (2010) attempted to investigate the effects of adopting ERM on a firm’s long-term performance, but failed to use time series data analysis techniques that could provide evidence of the durable relationship between ERM and performance. There is a The ERM-performance related studies cited above theoretical expectation that, when firms adopt have used data analysis techniques that are not and/or implement an ERM program, they derive capable of determining the medium to long-term several benefits. (CRO) appointment or presence of similar position and Baxter et al (2013) Building on these studies in a firm to signal ERM adoption, found a positive that provide empirical evidence that ERM adopand significant relationship between announce- tion does result in performance improvement of ment of CRO appointment (a proxy for ERM) and firms, and with similar theoretical expectation at performance. Short-term association Long-term association Causation relationship Responds to ERM shock
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