The Relationship Between ERM and Performance Revisited: Empirical Evidence from SMEs

Abstract

The purpose of this chapter is to examine the effects of risk-taking and enterprise risk management (ERM) on the financial performance of small- and medium-sized enterprises (SMEs). For measuring the ERM sophistication, we developed a new and comprehensive scoring approach, covering measures for risk management organization, risk management process and risk reporting. Based on data yielded by a quantitative survey among 263 German SMEs, we apply a structural equation model (SEM) to identify the critical components for ERM and the mediating effect of risk taking on the financial performance. This study also advances the risk-taking behaviour research in the SME context by introducing the effect of risk propensity and risk perception on the sophistication of the ERM system and its performance implications. To test the risk-taking behaviour, we used real-life decision-making cases. Our results show that personal risk attitudes play a significant role in the quality of the ERM system. SMEs with a higher risk attitude reveal a better ERM sophistication. Besides, the study explores the link between ERM and financial performance. Results show that SMEs with sound ERM often report a positive financial performance. Furthermore, the findings suggest that the ERM scoring approach can be a valuable tool for SMEs to enhance their risk management system.