A framework for the analysis of firm risk communication

In this paper, we propose a framework for the analysis of risk communication and an index to measure the quality of risk disclosure. Mainstream literature on voluntary disclosure has emphasized that quantity can be used as a sound proxy for quality. We contend that, in the analysis of the disclosure of risks made by public companies, attention has to be paid not only to how much is disclosed but also to what is disclosed and how.We apply the framework to a sample of nonfinancial companies listed in the ordinary market on the Italian Stock Exchange. To verify that the framework and synthetic index are not influenced by the two factors recognized in the literature as the most powerful drivers of disclosure behavior for listed companies, we use an OLS model. The regression shows that the index of disclosure quantity is not influenced either by size or industry. Thus, the synthetic measure can be used to rank the quality of the disclosure of risks.     

A framework to measure integrated risk

A framework underlying various models that measure the credit risk of a portfolio is extended in this paper to allow the integration of credit risk with a range of market risks using Monte Carlo simulation. A structural model is proposed that allows interest rates to be stochastic and provides closed-form expressions for the market value of a firm's equity and its probability of default. This model is embedded within the integrated framework and the general approach illustrated by measuring the risk of a foreign exchange forward when there is a significant probability of default by the counterparty. For this example moving from a market risk calculation to an integrated risk calculation reduces the expected future value of the instrument by an amount that could not be calculated using the common pre-settlement exposure technique for estimating the credit risk of a derivative.     

Systematic risk and the theory of the firm: A reexamination

A recent microeconomic model of the determinants of equity betas (Subrahmanyam and Thomadakis 1980) is generalized by including risky human capital in the market portfolio and allowing a general covariance structure between the model's sources of uncertainty. This provides an explanation of the ambiguous effect of operating leverage on beta by viewing human capital and equity contributors as risk sharers in the firm's output risk. This explanation may help to clarify the apparent conflict with the previous literature. The relationship between systematic risk and monopoly power is rederived and shown to depend upon a plausible condition on the correlation between wage rate and price uncertainty. Finally, the public policy implications of this analysis are presented.     

A comment on: “The solution to the forward-bias puzzle”

Pippenger (2011) recently proposed a solution to the longstanding forward-bias puzzle. He argues that the puzzling estimates obtained using the standard equation for the efficient markets hypothesis are due to omitted variable bias. He identifies the missing variables as the future change in the forward exchange rate and the future interest differential. When these are added to the standard equation, he finds a one-to-one relationship between the future change in the spot rate and the forward premium. However, we argue that his equation can only test covered interest parity and offers no insight into the forward-bias puzzle.     

Enterprise risk management: A systems-thinking framework for the event identification phase

Guidelines for developing and implementing a program of enterprise risk management have been developed by the Committee on Sponsoring Organizations of the Treadway Commission. One component of this risk management program is event identification, which involves developing a list of events that could affect the ability of the enterprise to meet its strategic and operating objectives. The guidelines establish objectives for event identification and suggest general procedures for identifying events that represent business risks. In this paper, I describe how systems-thinking could provide a framework to identify events that should be considered during risk assessment by (a) creating a map of the organization's value chain that specifies relationships among the atomic components of the business model, and (b) using a taxonomy of categories to analyze those relationships and identify events that could threaten business process performance.     

Sustainable development and the market : A framework for analysis

The environment has been confined to the margins of most research in the social sciences, particularly theoretical work on development. One consequence is that the environment has lacked an historical focus, which would allow us a broader, more comparative view of how nature is transformed under the impact of capitalist development. The object of this article is to sketch out such a framework, beginning with ‘autochtonous’ societies, in which sustainability, rather than development, is the key characteristic. The role of the market in transforming such societies is explored through a typology of social and environmental systems. In the light of the transformation of environmental goods, made necessary by market accumulation, the role of ‘environmental management’ is considered, and found to be inadequate. Sustainability, as a concept, needs to be related to the role of the market within the process of development itself.     

Enterprise risk management and firm performance: A contingency perspective

In recent years, a paradigm shift has occurred regarding the way organizations view risk management. Instead of looking at risk management from a silo-based perspective, the trend is to take a holistic view of risk management. This holistic approach toward managing an organization’s risk is commonly referred to as enterprise risk management (ERM). Indeed, there is growing support for the general argument that organizations will improve their performance by employing the ERM concept. The basic argument presented in this paper is that the relation between ERM and firm performance is contingent upon the appropriate match between ERM and the following five factors affecting a firm: environmental uncertainty, industry competition, firm size, firm complexity, and board of directors’ monitoring. Based on a sample of 112 US firms that disclose the implementation of their ERM activities within their 10Ks and 10Qs filed with the US Securities and Exchange Commission, empirical evidence confirms the above basic argument. The implication of these findings is that firms should consider the implementation of an ERM system in conjunction with contextual variables surrounding the firm.     

降低并购风险需建立全面风险管理框架

安永咨询有限公司企业风险管理服务部合伙人曹驯就海外并购的现状和亏损原因进行了详细的阐释,并提出通过建立全面的风险管理框架来降低海外并购风险。他说     

Enterprise risk management and firm performance: Role of the risk committee

In recent years, there have been increasing efforts in the corporate world to invest in risk management and governance processes. In this paper, we examine the impact of Enterprise Risk Management (ERM) on firm performance by examining whether firm performance is strengthened or weakened by the establishment of a board-level risk committee (BLRC), an important governance mechanism that oversees ERM processes. Based on 260 observations from FTSE350 listed firms in the UK during 2012–2015, we find the effectiveness of ERM significantly and positively affects firm performance. We also find strong BLRC governance complements this relationship and increases the firm performance effects of ERM. Our findings suggest the mere formation of a BLRC is not a panacea for ERM oversight; however, existence of a structurally strong BLRC is crucial for effective ERM governance.     

A dynamic analysis of the neglected firm effect

This study uses rolling regressions with panel data and conducts a dynamic analysis of the neglected firm effect, the negative relationship between the number of analysts and stock returns. For this reason, we use two samples of firms: one from the London Stock Exchange (LSE) and another from Bursa Malaysia (BM). The results reveal a significantly negative neglected firm effect only for the BM sample. In contrast the association between the number of analysts and stock returns is positive in some periods in the LSE. Size is not significant as a moderator, which suggests that the neglected firm effect does not vary with firm size, contrary to the findings in the previous literature. Finally, the neglected firm effect is nonstationary for both LSE and BM firms. Our results hold under a range of robustness tests and yield guidelines for investors regarding the types of markets and time periods for which analyst coverage is likely to matter most.     

Reply to the Discussion Note on the “The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence”

Pathak (2014) has raised both conceptual and methodological questions about Cai, Rahman, and Courtenay (2014). In this reply, we attempt to address the questions. The discussion arising from these questions suggests that IFRS adoption and the implications of IFRS are complex issues. Cai et al. (2014) try to illustrate that IFRS adoption is not a single-step solution. It has various stages. Some countries take gradual steps towards IFRS adoption and others embrace IFRS in one big step. Cai et al. (2014) also explain that IFRS adoption is associated with other institutional arrangements within a country. The issue of the manner in which IFRS is adopted across countries needs further investigation to better assess the country level impediments of IFRS adoption and how IFRS adoption affects market efficiency.