The impact of enterprise risk management on the value of firms listed at Nairobi Securities Exchange

Abstract

Risk management is seen as a method for handling the risks which an organization or individual is exposed to. Its main objectives are to protect the organization from severe financial disruption due to accidental losses, and do this at an affordable and none fluctuating cost. Companies face two risk categories: financial and non-financial risk. Based on the modern portfolio theory from Markowitz (1952), risk management is not valuable to shareholders. This is because shareholders can easily diversify their own risk, and therefore only the systematic risk is important. This study endeavored to ascertain the impact of Enterprise Risk Management implementation on the value of the firm. The study sought to answer the following research question what is the impact of Enterprise Risk Management implementation on the value of companies listed at Nairobi Securities Exchange. The research design employed in this study was descriptive research design inform of a survey. The population of interest of this study comprised of 60 companies listed at the Nairobi Securities Exchange (NSE, 2012). The study sampled 55 respondents who were the respondent for this study. The study covered a period of 5 years from year 2007 to year 2011. Questionnaires were designed to investigate the impact of Enterprise Risk Management implementation on the value of companies listed at Nairobi Securities Exchange.Descriptive statistics such as means and standard deviation were also used to help in data analysis. A multivariate regression equation was used. The study revealed that implementation of ERM lead to increase in the value of the company, thus companies listed in the NSE can add to their shareholders value by implementing ERM which will enable them have competitive advantage over companies that have not implemented ERM. Companies that have their primary focus on adding shareholder wealth should implement ERM as it does contribute to the company’s market value. Therefore, an ERM level positive coefficient indicates that companies that implement ERM in the NSE are valued higher than those that have not implemented ERM.