Empirical analysis of Enterprise Risk Management in Middle East countries

This thesis investigates several topics on Enterprise Risk Management (ERM), with a focus on the Middle eastern countries. This includes the relationship between ERM and firm value, the determinants of ERM, as well as the effects of board of directors’ characteristics and the corporate governance committee (CGC) on ERM adoption and implementation. Adoption and implementation of ERM by firms has gained popularity in recent years, especially after the 2008 global financial crises. Firms deal with complexities of both systematic and unsystematic risks, which have been exacerbated by the crises. This thesis focuses on ERM in corporate organisations in the Middle East countries, which have hitherto received limited attention in the extant literature. The thesis uses a novel dataset, collated by utilising a data-mining approach, for 273 firms from seven countries: Jordan, Saudi Arabia, Kuwait, United Arab Emirates, Oman, Qatar, and Bahrain for the period 2010 to 2018. The thesis contains three empirical chapters, an Introduction, a Literature review, and a Conclusion chapter.

Results for the first empirical chapter, Chapter 3, which investigates the impact of ERM on firm value (Tobin’s Q) and employs the Two-Stage Least Square method (2SLS), in addition to the basic pooled-OLS, indicate that ERM implementation has significant positive effects on firm value. Further, the results suggest that the adoption of ERM motivates the firms’ executives to commit to better risk management systems. This result, from further analysis on sub-samples, also holds for non-financial firms while the analysis on the supplemental sample for financial firms and Jordanian firms indicates no statistical association between firm value and ERM adoption, suggesting that the benefits of ERM are limited to specific industries and countries.

Chapter 4, the second empirical chapter, investigates the factors that influence ERM adoption. Using the probit model approach, the finding for the full sample indicates that financial companies are more likely to engage in ERM programmes, suggesting that banks, insurance, and energy firms are highly regulated due to the Basel Accord and close monitoring by the rating agencies. When comparing the full sample and the subgroups (financial and non-financial), the non-financial firms with lower opaque assets, lower leverage, as well as higher international operating corporations, are more likely to implement ERM programs. The result also holds for the full sample. The results also indicate that financial firms with lower industrial operation segments are more likely to adopt ERM programmes. It can, therefore, be concluded that the presence of big four auditors (PwC, EY, KPMG, Deloitte), the big three rating agencies (S&P, Moody’s, Fitch rating), and risk-aware culture have a positive significant effect on ERM for all the sample groups. The results imply that risk awareness and regulation pressure from rating agencies encourage ERM adoption.

The final empirical chapter, Chapter 5, investigates the role of the board of directors’ characteristics and corporate governance committee on the adoption and implementation of the ERM. Using the propensity score matching (PSM) approach, the findings show that boards of directors with independent board members play a significant role in ERM adoption. This suggests that independent board members will facilitate the board’s supervisory role as they play an essential role mediating the conflict of interest or self-dealing of insiders. Further, firms with fewer women on their board, and firms with CEO and Chair roles separated are more likely to implement an ERM program. When comparing the overall results of the Gulf countries and Jordan, firms in the former with more frequent meetings and have established a corporate governance committee are more likely to adopt an ERM program. Finally, though timespan is limited for comprehensive Covid-19 analyses, we do not find any significant effect on ERM adoption, suggesting that majority of the firms in the sample have already adopted ERM during the pre-Covid-19 years.