Exploring the Effect of Effective Risk Management Capabilities

A number of empirical studies have found significant increases in performance volatility and firm exits as periods of industry leadership become ever shorter (Baker and Kennedy, 2002; Comin and Philippon, 2006; Thomas and D’Aveni, 2009; Wiggins and Ruefli, 2005). These findings seem to reflect a more hostile and unforgiving competitive landscape, where it is difficult to sustain competitive advantage, and where the consequences of mal-adaptation are increasingly severe. The challenge of competing under uncertainty has been at the core of strategy and organization theory for a long time (Thompson, 1967), as the failure to respond to environmental change can badly hurt firm performance (Audia et al., 2000). These developments have encouraged the use of formal enterprise risk management frameworks (e.g. COSO, FERMA and ISO),1 and promoted Chief Risk Officers to oversee them (Liebenberg and Hoyt, 2003; Meulbroek, 2002; Pagach and Warr, 2011). Similarly, a number of studies have investigated the use of derivative instruments and found that it reduces price sensitivity, where lower cash flow variability is associated with favorable financing costs and higher stock valuations (e.g. Minton and Schrand, 1999; Rountree et al., 2005).