Strategic risk management and corporate value creation

Major corporate failures and volatile market conditions have intensified the focus on corporate risk management as the means to deal with turbulent business conditions where the ability to respond effectively to often dramatic environmental changes is considered an important source of competitive advantage. However, surprisingly little research has analyzed the presumed advantages of effective risk management or assessed important antecedents of the underlying risk management capabilities. Here we present a comprehensive study of risk management effectiveness and the relationship to corporate performance based on panel data for more than 3, 400 firms with over 33, 500 annual observations during the turbulent period 1991-2010. Determining effective risk management as the ability to reduce earnings and cash flow volatility, we find significant positive relationships to lagged performance measures after controlling for industry effects and company size. We also find that availability of slack resources and investment commitments affect the risk management capabilities and their relationship to performance.