The Determinants of Enterprise Risk Management (ERM) Practices in Malaysian Public Listed Companies

Abstract

The objective of this study is to examine the determinants of Enterprise Risk Management (ERM) adoption in Malaysian Public Listed Companies (PLCs). The study focuses on ten industries from five hundred and seventy four Public Listed Companies in Malaysia for the period 2007. These ten industries include industrial products, trading/services, consumer products, properties, constructions, plantations, infrastructure projects, technology, hotels and mining. Logit regression approach will be employed, and a dummy variable equals one if companies adopt ERM and zero otherwise, is used as the dependent variable. Seven independent variables used are Size, Leverage, Profitability, International Diversification, Ownership, Chief Risk Officer and Turnover. The main results of this research is that companies with high turnover, hiring Chief Risk Officer and companies that are not diversified internationally are more likely to adopt ERM. Interestingly, Size, Leverage, Profitability, and Ownership are not significant determinants of ERM practices.

Determinants and Value of Enterprise Risk Management: Empirical Evidence From the Literature

“…Since more diversified companies are faced with an increasing risk complexity, similar to company size, a positive relationship with ERM is assumed. The empirical results, however, cannot confirm this assumption in general, as only Razali et al (2011) find a positive significant relation for international diversification. Apart from that, the coefficients for (industrial and international) diversification are generally not significant and moreover negative with the exception of a positive relation for industrial diversification found in the insurance sample studied by Hoyt and Liebenberg (2011).…”

“…10 Hoyt and Liebenberg (2011) use the natural log of the stock returns' standard deviation, while Golshan and Rasid (2012) consider the difference of the year high and year low stock prices. 11 In Razali et al (2011), the measurement of (international) diversification (as a dummy variable)…”

“…In the empirical literature on the determinants of ERM, different multivariate methods are applied to study the hypotheses laid out in the previous subsection. 13 Liebenberg and Hoyt (2003), Beasley et al (2005), Razali et al (2011), and Golshan and Rasid (2012) use logistic regression models, for instance, 14 while Pagach and Warr (2011) apply a (proportional) hazard model (Cox model), which takes into account the impact of time on the hiring decision of a CRO, to overcome the issue of the assumption of the independence of all firm observations. 15…”

“…In contrast, according to the results in Hoyt and Liebenberg (2011), for instance, companies with lower financial leverage, which is generally associated with lower financial risks, may decide in favor of an ERM system to be able to take more financial risk in the future. 12 The percentage of the 30 largest shareholders is considered in Razali et al (2011). 13 Besides multivariate methods, several studies additionally present univariate statistics of the determinants for comparison between ERM and non-ERM companies.…”

“…For instance, several authors descriptively study the stage of the ERM implementation based on surveys, questionnaires, or interviews (see, e.g., Thiessen et al, 2001;Kleffner et al, 2003;Beasley et al, 2009Beasley et al, , 2010Daud et al, 2010;Altuntas et al, 2011;Daud et al, 2011;Yazid et al, 2011). Furthermore, there are quantitative studies that examine the determinants that significantly affect the implementation (or level) of an ERM framework by applying multivariate methods (see Liebenberg and Hoyt, 2003;Beasley et al, 2005;Liebenberg, 2008, 2011;Pagach and Warr, 2011;Razali et al, 2011;Golshan and Rasid, 2012), 3 while other quantitative studies deal with the shareholder (firm) value and performance as a consequence of an ERM implementation (see Beasley et al, 2008;Hoyt and Liebenberg, 2008;Gordon et al, 2009;Grace et al, 2013;Pagach and Warr, 2010;Hoyt and Liebenberg, 2011;McShane et al, 2011;Tahir and Razali, 2011).…”