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Risk Management Maturity, its Determinants and Impact on Firm Value: Empirical Evidence from Joint-Stock Companies in Bosnia and Herzegovina

Risk Management Maturity, its Determinants and Impact on Firm Value: Empirical Evidence from... The current extremely volatile business environment requires companies to manage a wide range of risks. Poor management of the company’s main risks can lead to significant value losses for key stakeholders. Companies strive to preserve and protect their value by developing risk management models based on or- ganisational culture, processes and structure. The main objective of this paper is to assess the maturity of risk management, explore its determinants and examine its impact on firm value. In order to quantify the ma- turity of the risk management model, we have created an index based on 31 reference components whose weighting values have been determined by a group of experts using the Delphi technique. In addition, this paper aims to identify the determinants of the risk management model maturity in companies in Bosnia and Herzegovina (B&H). Based on the estimated ordinary least squares (OLS) model, the results confirm that companies from the financial sector have more mature risk management models compared to the real sec- tor. Moreover, the size of the firm and the type of auditor were identified as additional determinants of risk management maturity. The OLS model confirms the positive and statistically significant impact of risk man- agement model maturity on Tobin’s Q value. Keywords: Enterprise risk management, Tobin’s Q, OLS estimator, Delphi technique, questionnaire, B&H JEL classification: G32, D81 Minela Nuhic Meskovic, PhD candidate (corresponding author) 1. Introduction Head of Department for plan and analysis The current economic environment’s complexity, University of Sarajevo instability, and unpredictability are a daily reminder E-mail: minela.nuhic-meskovic@unsa.ba that companies face many risks. Ignorance, poor as- Address: Obala Kulina bana 7/III, 71000 Sarajevo sessment and management of the main risks faced by ORCID: https://orcid.org/0000-0002-9207-5784 the company can result in significant losses of value for key stakeholders. Under such conditions, risk manage- Azra Zaimovic, PhD ment models, which are based on the organisational Associate Professor culture of risk management, processes for identifica- School of Economics and Business tion, assessment, treatment, control and monitoring of University of Sarajevo risks, and organisational structures can help preserve E-mail: azra.zaimovic@efsa.unsa.ba or even increase the value of the company whose ORCID: https://orcid.org/0000-0002-3956-4626 Copyright © 2021 by the School of Economics and Business Sarajevo 132 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 2. Literature review protection is based on the interests of its stakeholders. Theories offer conflicting explanations regarding the impact of risk management on company value. The topic of risk management has been the sub- While the CAPM model developed by Sharpe (1964) ject of numerous empirical studies. Global trends in does not recognise the value of non-systematic risk implementing the integrated concept of risk manage- management, which is fully diversified according to ment emphasise researching the maturity of risk man- this theory, and investors demand rewards only for agement approaches, determining the development exposure to systematic market risk, the theory of stra- of these models, and establishing the relationship be- tegic management conceptualised by the CLS model, tween the maturity of risk management models and introduced by Chatterjee et al. (1999) and further company performance. elaborated by Lai, Noor, and Fazilah (2011), assumes Khalik and Sum (2020) state that measuring the that a firm’s risk management leads to a reduction in maturity of a risk management model in empirical re- costs and required returns, which ultimately trans- search is based on the following three ways: (a) using lates into an increase in firm value. Some studies (e.g., proxy indicators, (b) S&P ratings, and (c) creating an in- Chakravarthy 1982; Child 1972; Summer 1980) indicat- dex. Proxy indicators are used as indirect indicators of ed that organizationally effective non-systematic risk risk management model maturity when it is impossi- management is a significant cause of organisational ble to measure or describe the implementation of risk evolution, while Bettis (1983) believes that effective management models directly. This method has been non-systematic risk management is the cause that used in the papers of Hoyt and Liebenberg (2011), determines which organisations survive and grow and Liebenberg and Hoyt (2003), Eckles, Hoyt, and Miller those who sink and die. (2014), Tahir and Razali (2011), Beasley, Pagach, and Empirical studies dealing with risk management Warr (2008), Pagach and Warr (2011), Agustina and and their impact on the value of companies are also Barororh (2016), Lechner and Gatzert (2018), and for cautious in their findings. Although most empirical indicators of a more mature form of risk management findings confirm that risk management has a positive model in the organisation, proxy indicators were such effect on company value, there is insufficient evidence as the presence of a general risk manager, risk com- that transmission mechanisms of risk management mittee, strategic risk management or integrated risk that affect company values are also applied in markets management process. Pooser and McCullough (2012), such as the B&H, which is often assessed as shallow, McShane, Nair, and Rustambekov (2011), Lin, Wen, inefficient and illiquid (Kumalić 2013; Planinić 2019). and Yu (2012), Baxter et al. (2013), Eckles, Hoyt, and In that regard, this paper attempts to answer the fol- Miller (2014) and Bohnert et al. (2019), in their papers, lowing research questions: Is there a relationship be- used Standard and Poor’s measurement methodology tween the maturity of risk management models and to assess risk management models. the company’s market values in B&H? Also, our goal is To address the shortcomings and limitations of to examine the determinants of maturity of risk man- measuring the maturity of risk management models agement in B&H companies, where a model for its as- using the above methods, which are reflected in the sessment was previously created. dichotomous or qualitative nature of risk manage- Based on the estimated OLS model, it was con- ment development assessment, some authors de- firmed that companies from the financial sector have veloped indices to measure the development of risk more mature risk management models compared to management models based on specific components the real sector. Also, the company’s size and the type of risk management standards such as ISO and COSO of auditor were identified as additional determinants ERM. The use of indices to measure the maturity of of risk management maturity. The results of the study risk management can be found in many works (e.g., confirmed the positive and statistically significant Desender and Lafuente 2009; Quon, Zeghal, and impact of the risk management maturity model on Maingot 2012; Gordon, Loeb, and Tseng 2009; Jakaša, Tobin’s Q value as a widely accepted measure of firm Osmanagić, and Iliopoulos 2008; Monda and Giorgino value in similar research. 2013; Altuntas, Berry-Stölzle, and Hoyt 2011; Yazid, The paper is structured as follows. After this intro- Hussin, and Daud 2011; Laisasisikorn and Rpmpho ductory part, an overview of the literature review is 2014; Sprčić, Pećina, and Orsag 2017; Wibowo and presented, while the third part contains the research Taufik 2017). methodology, sample selection and model speci- In examining the determinants of risk manage- fications. The fourth part of the paper refers to the ment model maturity, the authors find empirical research results, while the final part summarises the evidence in several studies that larger firms tend to paper’s main findings. adopt more mature risk management models (Hoyt SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 133 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H and Liebenberg 2008, 2011; Beasley, Clune, and future expectations. The only exception is the study Hermanson 2005; Pagach and Warr 2011; Farrell and by Beasley, Branson, and Pagach (2015), who use the Gallagher 2015). Some studies suggest that firms in cumulative abnormal returns after the announcement specific industries are more likely to adopt mature risk of the commitment of CRO. All of these studies were management models than others due to differences conducted for specific geographic areas or specific in regulatory requirements and risk awareness within industries within those areas. industries (Beasley, Clune, and Hermanson 2005; Golshan and Rasid 2012). For example, the banking and insurance industries are facing significant regula- 3. Research methodology tory pressure for integrative risk management due to solvency regulations through Basel III and Solvency The aim of this paper is to fill the gap represented II (Beasley, Clune, and Hermanson 2005; Gatzert and by the insufficient knowledge about the determinants Wesker 2012). Banks and insurance companies are of risk management in B&H firms and the impact of also in the focus of rating agencies. In addition, firms risk management on firm value. Accordingly, the fol- in the financial sector are particularly concerned with lowing hypotheses are tested: presenting an adequate and transparent risk manage- - H1: Firm size, industry sector, leverage ratio, and ment system in order to increase confidence in capi- type of auditor are determinants of more mature tal markets and expand funding sources (Hoyt and risk management models. Liebenberg 2008). - H2: Risk management in B&H joint-stock compa- Several empirical studies show a significant nies has a positive impact on firm value.. positive relationship between the adoption of a ma- ture risk management model and the choice of the In order to quantify the maturity level of risk man- firm’s auditor (Beasley, Clune, and Hermanson 2005; agement, a unique index for risk management was Golshan and Rasid 2012) and find that the auditor’s created. At the same time, the specific models were affiliation with the Big Four (KPMG, EY, Deloitte, or based on the OLS method for the cross-section. The PricewaterhouseCoopers) increases the likelihood of a index for measuring the maturity of risk management more effective risk management system (Golshan and models was created using the following formula: Rasid 2012). Financial structure, especially the lever- �� age, has been empirically shown to be a determinant of the maturity of risk management models, but with 𝐼𝐼 � �� ∙𝑐𝑐 �� � �� significant differences in the results in terms of signs. ��� Thus, while Hoyt and Liebenberg (2008, 2011) find a significant negative relationship between leverage where w , i = 1,2…31, are the aligned values of the i  𝑙𝑙𝑙𝑙 𝐼𝐼 � � �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥 �� � �������� � ���� and the risk management model maturity, Liebenberg weights of individual components in the model for and Hoyt (2003) and Golshan and Rasid (2012) find measuring the maturity of risk management of the � � 𝑙𝑙𝑙𝑙 𝑥𝑥 � � 𝑥𝑥 � � 𝑐𝑐 � 𝑙𝑙 ��𝑙𝑙 ������� ��   � �������� � ������� the opposite, positive relationship between these expert group, while c is the value of the i-th compo- in variables. nent on the n-th observation. The alignment process The relationship between risk management and is carried out through the implementation of Delphi market value is examined by Hoyt and Liebenberg techniques, while 31 𝑙𝑙𝑙𝑙����𝑙𝑙� componen � � � ts � have 𝑙𝑙𝑙𝑙 been 𝐼𝐼 iden �� ti- 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � �� � �������� � ���� (2011), Lechner and Gatzert (2018), Farrell and fied by Monda and Giorgino (2013) and include com- Gallagher (2015), Florio and Leoni (2017), Callahan ponents of organisational risk management culture, �� 𝑥𝑥 �� ln𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � ����� � �������� � ��� and Soielau (2017), Bohnert et al. (2019), who find a processes and organisational structure, whose impor- significant positive impact of risk management on the tance for effective and efficient risk management has �� 𝑥𝑥 �� 𝑥𝑥   � ������������ � ���������� value of the sampled companies. also been recognised by Zheng, Yang, and McLean McShane, Nair, and Rustambekov (2011) use five (2010), Lai and Shad (2017), and Lai and Samad (2010). � � 𝑙𝑙𝑙𝑙 𝑥𝑥 �� 𝑥𝑥 �� rating categories used by Standard and Poors and Farrel and Hoon (2009) argue that developing an or- � ������� �� �������� confirm a significant positive relationship between ganisational risk culture is essential and a necessary risk management and firm value. A positive but not element of implementation good risk management significant effect is found by Tahir and Razali (2011), practices. Risk management processes are, in essence, Li et al. (2014) and Sekerci (2015). In all studies, to ap- common to all international risk management frame- proximate shareholder value, Tobin’s Q indicator was works and range from objective setting, risk identifica- used as the ratio between the market value of the firm tion and assessment to risk treating, monitoring and and the sum of the book values of debt and equity, as reporting. Lundqvist (2015) appreciates that the con- a measure of generally accepted value that can reflect ceptual framework of mature risk management differs 134 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H from the traditional concept of risk management for a variable was logarithmic transformed in the initial management structure adapted to risk management model. Logarithmic transformation of independent processes and reflected in the structure, centralised continuous variables was performed to achieve better �� approach, established responsibilities and formalised linearity and model specifications. The model is spec - 𝐼𝐼 � �� ∙𝑐𝑐 �� � �� processes. ificated as follows: ��� Rowe and Wright (1999) state that the Delphi method, as a process of expert alignment of attitudes, 𝑙𝑙𝑙𝑙 𝐼𝐼 � � �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥 �� � �������� � ���� is based on four key elements: 1) anonymity of expert group members, 2) interactive decision making, 3) � � 𝑙𝑙𝑙𝑙 𝑥𝑥 � � 𝑥𝑥 � � 𝑐𝑐 � 𝑙𝑙 ��𝑙𝑙 ������� ��   � �������� � ������� controlled feedback, and 4) statistical aggregation of responsible groups that enables quantitative analysis wher   e x is industry affiliation variable as dum- industry and interpretation. Rowe and Wright (1999) also state my variable by assigning code 1 for companies in the 𝑙𝑙𝑙𝑙����𝑙𝑙� � � � � 𝑙𝑙𝑙𝑙 𝐼𝐼 �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � �� � �������� � ���� that for implementing this technique is necessary financial sector and 0 (zero) for companies in the non- to ensure a minimum of five experts. For the imple - financial sector. Companies in the financial sector, due �� 𝑥𝑥 �� ln𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   mentation of Delphi methods, in this research, eight to regulatory requirements, mainly aim to present an � ����� � �������� � ��� experts in the field of risk management from the ter - adequate and transparent risk management system ritory of B&H were formed, as follows: two representa- t o incr ease c onfidenc �� e in capital markets and increase 𝑥𝑥 �� 𝑥𝑥   � ������������ � ���������� tives of the academic community, one consultant, and sources of financing (Hoyt and Liebenberg 2008). five experts from practice. After the members of the lnx - The size of the company, measured by � � 𝑙𝑙𝑙𝑙 𝑥𝑥 �� 𝑥𝑥 �� size � ������� �� �������� expert group had been individually presented the the logarithmic size of the assets, is included in the objectives of the research, explained the procedure model because due to global trends, companies face of conducting the Delphi procedure, they were asked an increasing scope and complexity of risk (Nocco based on theoretical and practical experiences, to vali- and Stulz 2006). The principle of proportionality states date the identified components and determine their that larger companies face a more greater number of relative importance in the model through the process risks, resulting in the need for more sophisticated risk of adding weights. Although there are no universally management models (Hoyt and Liebenberg 2011). In accepted rules on the minimum level of consensus addition, larger companies can invest more financial, to be used, Sumsion (1998) proposes reaching 70 per technological, and human resources to implement cent consensus in each round. appropriate ERM programmes (Beasley, Clune, and The adopted consensus of experts for alignment Hermanson 2005; Golshan and Rasid 2012). of the values of individual c omponent weights is lnx - Financial leverage, as the log-ratio be- leverage achieved by consensus greater or equal to 75 per cent tween total liabilities and the book value of capital. on a single score (at least six identical answers out of The financial structure, especially leverage, was em- eight) as the first criteria. Also, the arithmetic aver - pirically found to be a determinant of the maturity age of weights reaching consensus in a narrow range of the risk management model, but with significant (± 10% of arithmetic mean in range) was used as the differences in the results in terms of signs. Reduction second criterion. In order to avoid creating a forced of default risk (Golshan and Rasid 2012) is quite an consensus instead of obtaining it spontaneously, acceptable and theoretical view that companies the arithmetic mean of the weights, if no consensus with mature risk management models may choose is reached based on the previous two criteria by the to increase leverage due to improved visibility into third iteration, was used after the third iteration. After risk (Hoyt and Liebenberg 2011). Risk management the implementation of each iteration, experts were activities enable companies to reduce debt costs by provided reports on the conducted iteration, where outlining corporate policies and strategies for risk they had the opportunity to see how other members management (Meulbroek 2002), contributing to more of the expert group proposed and then to change or favourable borrowing conditions. maintain their position. x - Type of audit as a categorical variable, auditor The OLS cross-sectional model was used to specify with two dummy variables, and the first one, in which the first empirical model used to determine the index code 1 (one) is assigned to companies whose last re- value determinants and test the first hypothesis. The port was audited by the auditor from the Big4 group choice of the model was conditioned by the fact that (Deloitte, PwC, Ernst and Young, KPMG), otherwise the dependent variable in the model is continuous, code 0 (zero), and another one, in which code 1 (one) namely the index for measuring the maturity of risk is assigned to companies whose last report was au- management created through a survey question- dited by some other audit company, otherwise code naire that was implemented in 2020. The dependent 0 (zero) is assigned. The reference variable represents SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 135 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H companies whose report has not been audited. One in suboptimal projects (Jensen 1986). Excessive lev- of the reasons for including this variable in the model erage, on the other hand, can increase bankruptcy. was theoretical and empirical evidence that auditors, Profitability control in the model was performed due especially from Big4 groups, are more diligent in au- to the fact that profitable companies could trade diting companies’ annual reports to preserve their higher returns on net assets and capital (Allayannis reputation (Tolleson and Pai 2011). Dummy variables and Weston 2001), achieving higher company value. for geographic diversification and international di- Industry diversification can affect company val- versification were used as control variables, as well as ues through economic mechanisms, broader access continuous variables for profitability and asset opac - to capital markets, and risk diversification (Lewellen ity, which could further affect the value of the index 1971; Teece 1980). On the other hand, diversification (Lechner and Gatzert 2018). The expected values of the can reduce performance if agency prices increase and variables included in the model are shown in Table 1. lead to inefficient business (Easterbrook 1984; Berger An additional OLS cross-section model was spec- and Ofek 1995). Consequently, the geographical di- ificated to measure the isolated effect of risk manage - versification of industry is included as a control varia- �� ment maturity on the firm’s value measured by Tobin’s ble of Tobin’s Q values. The theoretical predictions de- 𝐼𝐼Q. Ther � �� efore, in this model ∙𝑐𝑐 , as independent variables scribed for industrial and geographical diversification �� � �� are included created index as a measure of risk man- apply equally to international diversification. As is the ��� agement maturity, its significant determinants from case with industrial and geographical diversification, 𝑙𝑙𝑙𝑙 𝐼𝐼 � � �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥 the pr �� evious model and additional c � �������� � ���� ontrol variables international diversification is related to the costs they that could affect the dependent variable, value of have produced from unresolved agency problems � � 𝑙𝑙𝑙𝑙 𝑥𝑥 � � 𝑥𝑥 � � 𝑐𝑐 � 𝑙𝑙 ��𝑙𝑙 ������� ��   � �������� � ������� Tobin’s Q: leverage, profitability and dividend pay - and their benefits from economies of scale and risk ment, and the following model is specified: diversification. Furthermore, while some suggest that international diversification negatively affects Tobin’s Q (Denis and Yost 2002), there is also evidence that 𝑙𝑙𝑙𝑙����𝑙𝑙� � � � � 𝑙𝑙𝑙𝑙 𝐼𝐼 �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � �� � �������� � ���� the effects of international diversification (Bodnar, Tang, and Weintrop 1997) are positive. �� 𝑥𝑥 �� ln𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � ����� � �������� � ��� Following a study by Allayannis and Weston (2001) and Lang and Stulz (1994), the indicator variable �� 𝑥𝑥 �� 𝑥𝑥   � ������������ � ���������� for dividend payout was included as a control vari- able. Empirical evidence on the relationship between � � 𝑙𝑙𝑙𝑙 𝑥𝑥 �� 𝑥𝑥 �� � ������� �� �������� dividend payout and company values is t wo-fold. Investors may view the payment of cash in the form The inclusion of these control variables was con- of dividends as a sign of exploitation of growth oppor- sistent with Lechner and Gatzert (2018), Hoyt and tunities, which may negatively affect the company’s Liebenberg (2003), and Bohnert et al. (2019). The value. In contrast, if dividends reduce free cash flows theoretical justification for including the control that could be used for excessive management spend- variable leverage is that the use of financial leverage ing, dividend payments could positively affect value could increase the value of firms by reducing free cash (Hoyt and Liebenberg 2003). flow that might otherwise be invested by a manager Table 1. Theoretically expected values of included variables in model 1 Variables Definition Theoretically expected value Industry affiliation variable + industry Size of the company, measured by the logarithmic lnx size size of the assets Logarithmic relationship between total liabilities lnx leverage and the book value of capital. Type of audit + auditor Source: Authors’ creation 136 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 3.1. Sample selection and data collection individual index components. After implementing the first iteration, the identified components for assess- The research was conducted with joint-stock com- ing the maturity of the risk management model were panies in B&H, i.e., companies with evident business validated, and the weights were aligned for the eight continuity, regardless of financial results. From the re - offered components. The second iteration resulted in cords of registers of both securities in B&H, we have the alignment of 10 components, while in the third it- eliminated companies in bankruptcy proceedings, eration, a consensus was reached on two components. liquidation, change of the organizational, legal form, Due to the visible overload of the expert group, the and those whose banking accounts are blocked. Due values of the other weights were determined by the to the specifics of financial reporting of investment arithmetic mean after the third iteration. Interestingly, funds, they are excluded from the research popula- the academic representatives of the expert group rec- tion. The structure of the research population is pre- ognised and gave greater importance to the compo- sented in Table 2. nents that were also recognised in previous research A questionnaire (available in the Appendix) asking as proxy indicators of more mature risk management. B&H companies to perform self-assessment on a scale The consensus reached at each iteration is shown in of 1 to 5 for each of the 31 components of the cre- Table 3. ated index was distributed to 579 previously collected In the structure of the index, the expert group email addresses of companies in the total population. ranked the components from the risk management We received 141 complete responses, resulting in a process segment the highest, with a total of 39.62 response rate of 24.35%. Secondary data for other weights, the organisational culture with 31.43 and variables in the specified models were collected from then the organisational structure with 28.61. Among the financial statements of the observed companies the individual components, the components in the or- for the year 2019. Data were collected through the ganisational structure, the establishment of a separate Bisnode business data service and financial reports function for risk management and the appointment that companies submit to the entity stock exchanges. of a chief risk officer have the highest values of the aligned weights. The management commitment component was 4. Results rated the most critical in the organisational risk cul- 4.1. Index of maturity of risk management ture segment, which is not surprising. Wibowo and As already methodologically presented, we have Taufik (2017) appreciate that implementing effective created an index using the Delphi technique, which risk management processes requires top manage- meant an iterative adjustment of the weight values f or ment’s strong and sustainable commitment to these Table 2. Research population Total number Excluded from research population cause: Total research of stock issuers bankruptcy, liquidation, blocked banking population in B&H accounts, and investment funds Federation of B&H 559 321 238 Republic Srpska entity 1,058 726 332 Brcko District of B&H 19 10 9 Total 1,636 1,057 579 Source: Authors’ creation Table 3. Consensus reached on iterations Number of components Consensus reached at iterations I iteration 8 25.80% II iteration 10 58.06% III iteration 2 64.52% IV- based on arithmetic mean 11 100.00% Source: Authors’ creation SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 137 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H processes. Zhao, Hwang and Low (2013) ranked this a segment of the risk management process, this com- component as the first item, appreciating that risk ponent is closely related to the other two components management goes precisely “top-down” direction. segments. In the segment of risk management processes, the An overview of the aligned weights of identified integration of risks into strategic and business plans components is given in the following table: got the highest value. Although identified as part of Table 4. Values of weights aligned by experts using Delphi technique Organisational Board of directors and top management commitment 4.92 risk culture Common risk language shared within the organisation 4.92 (31.43) Clear defining and communicating of a risk management policy 4 Organising learning programs for employees 3.06 Clear communicating of objectives, policies, and risk tolerance thresholds throughout 3 the entire organisation Sharing and communicating risk information 3 Risk appetite definition and an explicit risk-appetite statement 2.75 Definition of a risk tolerance threshold for each objective of the organisation 2.25 considering the risk appetite Integrating the risk management with the Performance Measurement System (PMS) 2.03 particularly with the Balanced Scorecard (BSC) Designing a remuneration and incentive system 1.5 Risk Integration of RM in the strategic and business plans 4 management Creation and maintenance of a risk register 3.759 process Properly using the technology as an aid to support risk management activities 3.5875 (39.62) Implementation of an efficient and effective process for identifying all relevant potential 3.06 risks Using qualitative and quantitative techniques in risk assessment formal process 3.06 Development of adequate contingency plans 3.03 Periodical repetition of the risk assessment process 3 Risk integration in a risk portfolio and evaluation of correlations between them 3 Defining treatment strategy (avoidance, reduction, sharing, retention), considering a 3 trade-off between costs and benefits, for each risk Existence of a periodic risk-reporting system 3 Risk classification into risk categories (e.g., strategic, operational, financial, and 2.625 compliance, or strategic, operational, financial, and hazards) Prioritisation of risks on a residual basis 2.5 KRI system developing for monitoring risk exposure and ensure it is coherent with KPIs 2 and firm strategy, inclusive with correction and escalation plans if risks exceed the limits Organisational Building a dedicated RM function 5 structure Appointment of a Chief Risk Officer (CRO) 4.95 (28.61) Involving all employees, at all levels, in the risk management process 3.625 Independence of the RM function (direct reporting of CRO to the Board or to the CEO) 3.5 Integration of the process of RM among all the business functions and unit 3.05 Designation of an RM group or team to support CRO’s job 3 Defining and communicating of roles and responsibilities for the management of risks 2.7875 Identifying risk owners responsible for the identification and management of each risk 2.7 Source: Authors’ calculations 138 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H By weighting the presented components, we At least 50% of the analysed companies had an have created an index based on 31 components. index value less than or equal to 250.93 index points Considering that the values of weights of individual (37.94 on a scale from 0 to 100). The company from components were determined by aligning of experts’ the activities of water supply, wastewater disposal and opinions based on the already mentioned criteria and waste management had the lowest value. The distri- that accordingly the value of some weights was deter- bution of the index is given above. mined on the basis of the arithmetic mean of 75% of proposed weights, the index ranges from 99.664 (for all answers 1) to 498.32 (for all values 5), and it is pos- 4.2. Determinants of the maturity of sible to scale it on a scale from 0 to 100. Descriptive risk management and the impact of risk statistics of the index is presented in Table 5. management on the value of companies Tables 6 and 7 present the elements of descrip- Table 5. Descriptive statistics of index tive statistics for the variables used in the specified models and the results of the first specified model, I I (0 – 100) respectively. RM RM Determinants of the created index are estimated Average 260.52 40.35 based on the specified cross-section model. Of the St. deviation 95.031 23.83 141 observations for which data were collected, eight Max 469.87 92.86 were identified as outliers. By keeping the outlier un- Min 99.664 0 der control, the result meets all the assumptions of the OLS model. Median 250.93 37.94 The p-value of the Ramsey reset test of 0.2155 Source: Authors’ calculations confirmed that the model was correctly specified. Homoscedasticity assumption of random error was The average value of the index is 260.52 points or satisfied and approved by the p-value of the Breusch- 40.35 points on a scale from 0 (zero) to 100. The high- Pagan homoscedasticity test of 0.3475. Also, the cor- est value of the index was recorded in the value of responding p-value of the SK-residual normality test 469.87 (92.86) and belonged to companies from the of 0.5633 was higher than the accepted error level, so financial sector. the residual normality hypothesis was not rejected. The values of the VIFs for all variables were less than 5, Figure 1: Distribution of index Number of companies 0‐20 20‐40 40‐60 60‐80 80‐100 Source: Authors’ creation SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 139 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H Table 6. Descriptive statistics Variables Mean Std.dev. Min. Max. Observations lnI Index RM 5.495 0.373 4.6 6.15 141 RM Industry 0.170 0.377 0 1 141 industry Size 16.144 2.178 11.76 21.95 141 lnx size Leverage -1.118 1.765 -5.62 2.58 141 ln x leverage Profitability 0.016 0.073 -0.24 0.42 141 lnx ROA Geographical 0.355 0.480 0 1 141 geogr.divers diversification International 0.603 0.491 0 1 141 int.divers diversification Auditor type - Big4 0.163 0.371 0 1 141 auditor_Big4 Auditor - others 0.659 0.475 0 1 141 auditor_other Opacity of assets 0.013 0.043 0 0.32 141 lnx opacity Source: Authors’ calculations Table 7. Estimated parameters of model 1 Dependent lnindex variable: Independent Coeff. Std.dev [95% interval] t P> | t | variables Constant 4.455 0.179 24.81 0.000* 4.100 4.811 Industry 0.371 0.058 6.35 0.000* 0.255 0.486 industry Company size 0.047 0.011 4.47 0.000* 0.027 0.069 lnx size Leverage 0.007 0.010 0.71 0.482 -0.013 0.028 lnx leverage Auditor type - Big4 0.307 0.077 3.99 0.000* 0.154 0.460 auditor_Big4 Auditor - others 0.272 0.050 5.38 0.000* 0.171 0.371 auditor_other Profitability 0.281 0.243 1.15 0.251 -0.201 0.762 lnx ROA Geographical 0.074 0.043 1.73 0.086*** -0.010 0.159 geogr.divers diversification International -0.059 0.040 -1.47 0.145 -0.139 0.021 int.divers diversification Opacity of assets 0.695 0.493 1.41 0.161 -0.281 1.672 lnx opacity Source: Authors’ calculations whereby all assumptions were met, and the estimated sector and type of auditor are determinants of more parameters met the criteria BLUE, the best linear un- matured risk management in B&H companies. biased estimators. The model explains 75.61% of the Table 8 presents the results of the estimated total variability of the dependent variable, which is model, the impact of the index on the market value of the coefficient of determination of the model. the company. The model was estimated on 107 obser- As the p-values for the variables of firm size, sector vations; how many of 141 companies that have been and type of auditor are less than the error level of 1%, collected data, are listed on the stock exchange, and statistical significance was confirmed at all conven- Tobin’s Q was used as an indicator of market value. tional levels of significance for these variables, which This model also satisfied the Ramsey reset test leads to the conclusion that with 99% certainty, we of the functional form (p-value = 0.5287). Keeping cannot reject the hypothesis that firm size, industry four outliers in the model under control resulted in 140 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H Table 8. Results of the estimated model of measuring the impact of RM on the value of Tobin’s Q Dependent variable: lnTobin's Q Independent Robust Coeff. t P> | t | [95% interval] variables Std.dev. Constant -1.194 0.920 -1.30 0.198 -3.022 0.633 lnI Index 0.337 0.202 1.66 0.099*** -0.065 0.739 RM Industry 0.027 0.169 0.16 0.872 -0.308 0.362 sektor Company size -0.069 0.026 -2.63 0.010* -0.121 -0.017 lnx size Auditor type - Big4 0.210 0.264 0.79 0.429 -0.315 0.735 auditor_Big4 Auditor - others -0.048 0.129 -0.37 0.709 -0.305 0.208 auditor_other Geographical -0.084 0.094 -0.89 0.375 -0.270 0.103 geogr.divers diversification Leverage 0.218 0.029 7.62 0.000* 0.161 0.275 lnx leverage Profitability 0.603 0.930 0.65 0.518 -1.244 2.451 lnx ROA International 0.099 0.094 1.06 0.292 -0.087 0.287 int.divers diversification Opacity of assets 0.563 1.092 0.52 0.608 -1.607 2.732 lnx opacity Dividend payments 0.033 0.117 0.28 0.779 -0.199 0.265 dividend Source: Authors’ calculations 5. Discussion and conclusion satisfying the residual normality assumption, and the p-value of the SK test was 0.5626. The residual normal- ity assumption cannot be rejected. VIF values also kept The creation of an index to measure the matu- values below 5 in this model, and the consequences of rity of risk management models, validated for this disturbing the heteroskedasticity assumption are pre- research by a group of experts in these fields, allowed vented by using White-Huber standard errors (Gujarati the quantification and ranking of companies in B&H 2003). The coefficient of determination of the model according to the maturity of the risk management was 61.91%, which explains the variability of the de- model and gives companies the opportunity to self- pendent variable. assess the risk management model. The proposed Based on the estimated model, the index as a index includes 31 components identified in the refer - measure of the maturity of risk management showed ence literature: Organisational Culture, Organisational explanatory power in explaining the variability of the Risk Management Processes, and Structure. Compared dependent variable Tobin’s Q, at an error level of up to to the reference study by Monda and Giorgino (2013), 10%. As the coefficient of the positive sign was esti- eight additional components were added to the in- mated with the index variable, and due to the p-value dex. The inclusion of these components enables a of 0.099, which is less than the error level of 0.10, we more comprehensive understanding of the risk man- did not reject the hypothesis of a significant positive agement approach in B&H companies. impact of risk management in explaining the value The results of the study show that the companies of companies. Also, next to it, the size variable had a in B&H do not have mature components of an inte- significant but negative sign in the model, which is grated risk management approach. The average value consistent with the findings of Allayannis and Weston of the created index on the scale from 0 to 100 was (2011) and Lang and Stulz (1994). The leverage varia- 40.35 points, while the highest value of the index was ble showed a significant positive effect on the value of 92.86 points and belonged to a company from the fi- Tobin’s Q. Due to the significance of the variable lnI , nancial sector. RM  on the value measure Tobin’s Q, we cannot reject the Although the maturity of risk management models hypothesis that the process of risk management in is generally low, the study results have revealed that joint-stock companies is in the function of creating larger companies and those coming from the financial their value.  sector have more mature risk management models. The company size as a determinant of the maturity SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 141 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H of risk management models is also confirmed in the empirical part of this paper. Despite the likelihood, papers of Hoyt and Liebenberg (2008, 2011), Pagach these limitations may have affected the results of this and Warr (2011), Farrell and Gallagher (2015) and study, it is assumed that their effects are marginal and Lechner and Gatzert (2018). Statistically, significant that they have not expressively influenced the find- more matured risk management models in the finan- ings and conclusions of this study. cial sector result from stricter regulatory requirements In methodological terms, further research can regarding risk management, thus guaranteeing a sta- be contributed through serious work on expanding, ble financial system, and is in line with the findings of developing and improving the scale for measuring Beasley, Clune, and Hermanson (2005), and Lechner the maturity risk management models. In addition to and Gatzert (2018). As a determinant of a more ma- the identified significant determinants, the existing tured risk management approach, the variable of au- model can be extended with additional variables to ditor types was also identified. Companies whose last improve its representative measures. The impact of financial report was audited by auditors from the Big4 risk management can be observed on some other firm group or some other audit firm had more matured risk performance, individually or integrated, in addition management models compared to companies whose to Tobin’s Q. Various statistical models and methods, financial statements were not audited in any way. The such as SEM, logit probit analysis and the like, can cer- same findings come from Golshan and Rashid (2012), tainly be used for this purpose. and Beasley, Clune, and Hermanson (2005), who con- firm a significant positive sign in front of the auditor type variable. It affirms that companies whose report was audited by a Big4 auditor have more mature risk References management models. In our analysis, leverage was not found as a significant determinant of maturity of Agustina, L., and Baroroh, N. 2016. The relationship between risk management, which is consistent with findings Enterprise Risk Management (ERM) and firm value me - come from Lechner and Gatzert (2018), Farrell and diated through the financial performance.  Review of Gallagher (2015), and Pagach and Warr (2011). Integrative Business and Economics Research, 5(1), 128. Despite the fact that the risk management models Allayannis, G., and Weston, J. P. 2001. The use of foreign cur- in joint-stock companies in Bosnia and Herzegovina rency derivatives and firm market value. The review of are still not at the level of best international man- financial studies, 14(1), 243-276. agement practices, the study findings indicated that Altuntas, M., Berry-Stölzle, T. R., and Hoyt, R. 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Component: Management and the board of directors Board of directors and top management commitment are involved in the risk management process: Question: 5 - in all aspects and phases of manage- Assess the extent to which management and the board of directors are ment of all risks involved in the company’s risk management process: 4 - in all aspects and phases of manage- ment of the most critical risks 3 - partly for the most critical risks 2 - minimal 1 - not at all 2. Component: 5 - completely Common risk language shared within the organisation 4 - significant 3 - partially Question: 2 - minimal Assess the extent to which the company has implemented some of the 1 - not at all risk management standards (such as ISO 31001, COSO, FERMA, etc.): 3. Component: Policies and procedures are: Clear defining and communicating of a RM policy 5 - Fully defined for all risks 4- Fully defined for the most critical risks Question: 3 - Partially established policies and pro- Assess the extent to which the company has established risk manage- cedures for the most critical risks. ment policies and procedures in the company: 2 - There are no policies and procedures, but they are in preparation. 1 -There are no risk management poli- cies and procedures. 4. Component: 5 - monthly and more often Organising learning programs for employees 4 - quarterly 3 - semi-annually Question: 2 - annually Assess the extent to which the company implements professional 1 - not at all development and employee training programs to manage risks more effectively: 5. Component: 5 - completely Clear communicating of objectives, policies, and risk tolerance thresh- 4 - significantly olds throughout the entire organisation 3 - partially Question: 2 - minimal 1 - not at all Assess the extent to which RM objectives and policies are clearly com- municated through the company: SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 145 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 6. Component: 5 - fully implemented for more than Sharing and communicating risk information three years 4 - fully implemented up to 3 years Question: 3 - partially implemented Assess the stage of the process of implementing the company’s 2 - not implemented, but implementa- information system tion is planned in the coming period 1 - not implemented and there is no implementation plan in the coming period 7. Component: 5 - completely Risk appetite definition and an explicit risk-appetite statement 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which the company has articulated risk appetites in 1 - not at all the context of strategic planning: 8. Component: 5 - completely Definition of a risk tolerance threshold for each objective of the organi- 4 - significantly sation considering the risk appetite 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which risk tolerance thresholds are aligned with organisational objectives: 9. Component: 5 - completely Integrating RM with the Performance Measurement System (PMS), par- 4 - significantly ticularly with the Balanced Scorecard (BSC) 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the company’s risk management activities and policies are integrated into the performance measurement system: 10. Component: 5 - completely Designing a remuneration and incentive system 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which internal policies and procedures have 1 - not at all established incentives and rewards for employees for outstanding performance: Process 11. Component: 5 - completely Integration of RM in the strategic and business plans 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which the company’s risk management activities 1 - not at all and policies are integrated into strategic and business plans 12. Component: 5 - The risk register exists and is regu- Creation and maintenance of a risk register larly updated. 4 - The risk register exists and is updated Question: periodically. Assess the stage of the process of creating and maintaining a risk 3 - The risk register is being prepared. register: 2 - There is no risk register, but it is planned in the coming period. 1 - The risk register does not exist and is not planned in the coming period. 146 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 13. Component: 5 - completely Properly using the technology as an aid to support risk management 4 - significantly activities 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the implemented information system in the company ensures the integration of business processes: 14. Component: 5 - completely Implementation of an efficient and effective process for identifying all 4 - significantly relevant potential risks 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the process of identifying or reviewing po- tentially significant risks that may affect the achievement of objectives has been identified: 15. Component: 5 - quantitative and qualitative methods Using qualitative and quantitative techniques in risk assessment formal 4 - quantitative methods process 3 - qualitative methods 2 - subjective assessment of the Question: assessor Which methods does the company primarily use in risk assessment? 1 - none of the above 16. Component: 5 - completely Development of adequate contingency plans 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which the company has provided recovery plans to 1 - not at all ensure the operation of key operations in crisis situations: 17. Component: 5 - monthly and more often Periodical repetition of the risk assessment process 4 - quarterly 3 - semi-annually Question: 2 - annually Evaluate how often risk assessment is done in your company: 1 - not at all 18. Component: 5 - completely Risk integration in a risk portfolio and evaluation of correlations be- 4 - significantly tween them 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the integration of risk into the company’s risk portfolio and the assessment of the company’s risk linkage are carried out: 19. Component: 5 - completely Defining treatment strategy (avoidance, reduction, sharing, retention), 4 - significantly considering a trade-off between costs and benefits, for each risk 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which RM strategies are established for identified risks: 20. Component: 5 - monthly and more often Existence of a periodic risk-reporting system 4 - quarterly 3 - semi-annually Question: 2 - annually Assess how often the boards are reported on the company’s risks: 1 - not at all SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 147 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 21. Component: 5 - completely Risk classification into risk categories (e.g., strategic, operational, finan- 4 - significant cial, and compliance, or strategic, operational, financial, and hazards) 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which risk classification is carried out for the pur - poses of RM according to established criteria (strategic, operational, financial, compliance, etc.): 22. Component: 5 - completely Prioritisation of risks on a residual basis 4 - significant 3 - partially Question: 2 - minimal Assess the extent to which risk prioritisation is implemented in the 1 - not at all company: 23. Component: 5 - completely KRI system developing for monitoring risk exposure and ensure it is co- 4 - significant herent with KPIs and firm strategy, inclusive with correction and escala- 3 - partially tion plans if risks exceed the limits 2 - minimal 1 - not at all Question: Assess the extent to which recovery plans for providing key operations in crisis situations have been tested in the company: Organisational structure 24. Component: 5 - systematised and established func- Building a dedicated RM function tion/department for more than three years Question: 4 - systematised and established func- Assess at what stage is the establishment and construction of a dedi- tion/department for more than one cated function / department in charge of risk management year 3 - systematised and established func- tion/department shorter than one year 2 - systematized or non-established function 1 - a separate function/department is not systematised or established 25. Component: 5 - appointed general risk manager Appointment of a CRO more than three years ago 4 - appointed general risk manager Question: more than one year ago Assess the stage of the process of appointing the CRO: 3 - appointed general risk manager less than one year ago 2 - the general risk manager is in the process of selection 1 - no general risk manager has been appointed 26. Component: 5 - completely Involving all employees, at all levels, in RM process 4 - significant 3 - partially Question: 2 - minimal Asess the extent to which all employees at all levels are involved in the 1 - not at all RM process: 148 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 27. Component: 5 - completely Independence of RM function (direct reporting of CRO to board or to 4 - significant CEO) 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the independence and objectivity of the risk management function/department is ensured: 28. Component: 5 - completely Integration of the process of RM among all the business functions and 4 - significant unit 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which all business processes in the company have been identified and documented: 29. Component: 5 - appointed interdisciplinary teams Designation of a RM group or team to support CRO’s job more than three years ago 4 - appointed interdisciplinary team Question: more than one year ago Assess the stage of appointing interdisciplinary risk management teams 3 - appointed interdisciplinary team less that provide functional support in the work of the chief risk manager than one year ago and an understanding of all the company’s risks 2 - an interdisciplinary team to support the work of the chief risk manager is in the selection process 1 - there are no separate teams to assist the work of the chief risk manager 30. Component: 5 - completely Defining and communicating of roles and responsibilities for the man- 4 - significant agement of risks 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the roles and responsibilities of all those involved in the risk management process have been identified 31. Component: 5 - designated process owners Identifying risk owners responsible for the identification and manage - 4 - RM department ment of each risk 3 - internal audit department 2 - finance/accounting department Question: 1 - no one in the company identifies the Indicate which of the following functions/departments is responsible for risk identifying and managing risks: SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 149 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South East European Journal of Economics and Business de Gruyter

Risk Management Maturity, its Determinants and Impact on Firm Value: Empirical Evidence from Joint-Stock Companies in Bosnia and Herzegovina

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de Gruyter
Copyright
© 2021 Minela Nuhic Meskovic et al., published by Sciendo
ISSN
2233-1999
eISSN
2233-1999
DOI
10.2478/jeb-2021-0019
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Abstract

The current extremely volatile business environment requires companies to manage a wide range of risks. Poor management of the company’s main risks can lead to significant value losses for key stakeholders. Companies strive to preserve and protect their value by developing risk management models based on or- ganisational culture, processes and structure. The main objective of this paper is to assess the maturity of risk management, explore its determinants and examine its impact on firm value. In order to quantify the ma- turity of the risk management model, we have created an index based on 31 reference components whose weighting values have been determined by a group of experts using the Delphi technique. In addition, this paper aims to identify the determinants of the risk management model maturity in companies in Bosnia and Herzegovina (B&H). Based on the estimated ordinary least squares (OLS) model, the results confirm that companies from the financial sector have more mature risk management models compared to the real sec- tor. Moreover, the size of the firm and the type of auditor were identified as additional determinants of risk management maturity. The OLS model confirms the positive and statistically significant impact of risk man- agement model maturity on Tobin’s Q value. Keywords: Enterprise risk management, Tobin’s Q, OLS estimator, Delphi technique, questionnaire, B&H JEL classification: G32, D81 Minela Nuhic Meskovic, PhD candidate (corresponding author) 1. Introduction Head of Department for plan and analysis The current economic environment’s complexity, University of Sarajevo instability, and unpredictability are a daily reminder E-mail: minela.nuhic-meskovic@unsa.ba that companies face many risks. Ignorance, poor as- Address: Obala Kulina bana 7/III, 71000 Sarajevo sessment and management of the main risks faced by ORCID: https://orcid.org/0000-0002-9207-5784 the company can result in significant losses of value for key stakeholders. Under such conditions, risk manage- Azra Zaimovic, PhD ment models, which are based on the organisational Associate Professor culture of risk management, processes for identifica- School of Economics and Business tion, assessment, treatment, control and monitoring of University of Sarajevo risks, and organisational structures can help preserve E-mail: azra.zaimovic@efsa.unsa.ba or even increase the value of the company whose ORCID: https://orcid.org/0000-0002-3956-4626 Copyright © 2021 by the School of Economics and Business Sarajevo 132 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 2. Literature review protection is based on the interests of its stakeholders. Theories offer conflicting explanations regarding the impact of risk management on company value. The topic of risk management has been the sub- While the CAPM model developed by Sharpe (1964) ject of numerous empirical studies. Global trends in does not recognise the value of non-systematic risk implementing the integrated concept of risk manage- management, which is fully diversified according to ment emphasise researching the maturity of risk man- this theory, and investors demand rewards only for agement approaches, determining the development exposure to systematic market risk, the theory of stra- of these models, and establishing the relationship be- tegic management conceptualised by the CLS model, tween the maturity of risk management models and introduced by Chatterjee et al. (1999) and further company performance. elaborated by Lai, Noor, and Fazilah (2011), assumes Khalik and Sum (2020) state that measuring the that a firm’s risk management leads to a reduction in maturity of a risk management model in empirical re- costs and required returns, which ultimately trans- search is based on the following three ways: (a) using lates into an increase in firm value. Some studies (e.g., proxy indicators, (b) S&P ratings, and (c) creating an in- Chakravarthy 1982; Child 1972; Summer 1980) indicat- dex. Proxy indicators are used as indirect indicators of ed that organizationally effective non-systematic risk risk management model maturity when it is impossi- management is a significant cause of organisational ble to measure or describe the implementation of risk evolution, while Bettis (1983) believes that effective management models directly. This method has been non-systematic risk management is the cause that used in the papers of Hoyt and Liebenberg (2011), determines which organisations survive and grow and Liebenberg and Hoyt (2003), Eckles, Hoyt, and Miller those who sink and die. (2014), Tahir and Razali (2011), Beasley, Pagach, and Empirical studies dealing with risk management Warr (2008), Pagach and Warr (2011), Agustina and and their impact on the value of companies are also Barororh (2016), Lechner and Gatzert (2018), and for cautious in their findings. Although most empirical indicators of a more mature form of risk management findings confirm that risk management has a positive model in the organisation, proxy indicators were such effect on company value, there is insufficient evidence as the presence of a general risk manager, risk com- that transmission mechanisms of risk management mittee, strategic risk management or integrated risk that affect company values are also applied in markets management process. Pooser and McCullough (2012), such as the B&H, which is often assessed as shallow, McShane, Nair, and Rustambekov (2011), Lin, Wen, inefficient and illiquid (Kumalić 2013; Planinić 2019). and Yu (2012), Baxter et al. (2013), Eckles, Hoyt, and In that regard, this paper attempts to answer the fol- Miller (2014) and Bohnert et al. (2019), in their papers, lowing research questions: Is there a relationship be- used Standard and Poor’s measurement methodology tween the maturity of risk management models and to assess risk management models. the company’s market values in B&H? Also, our goal is To address the shortcomings and limitations of to examine the determinants of maturity of risk man- measuring the maturity of risk management models agement in B&H companies, where a model for its as- using the above methods, which are reflected in the sessment was previously created. dichotomous or qualitative nature of risk manage- Based on the estimated OLS model, it was con- ment development assessment, some authors de- firmed that companies from the financial sector have veloped indices to measure the development of risk more mature risk management models compared to management models based on specific components the real sector. Also, the company’s size and the type of risk management standards such as ISO and COSO of auditor were identified as additional determinants ERM. The use of indices to measure the maturity of of risk management maturity. The results of the study risk management can be found in many works (e.g., confirmed the positive and statistically significant Desender and Lafuente 2009; Quon, Zeghal, and impact of the risk management maturity model on Maingot 2012; Gordon, Loeb, and Tseng 2009; Jakaša, Tobin’s Q value as a widely accepted measure of firm Osmanagić, and Iliopoulos 2008; Monda and Giorgino value in similar research. 2013; Altuntas, Berry-Stölzle, and Hoyt 2011; Yazid, The paper is structured as follows. After this intro- Hussin, and Daud 2011; Laisasisikorn and Rpmpho ductory part, an overview of the literature review is 2014; Sprčić, Pećina, and Orsag 2017; Wibowo and presented, while the third part contains the research Taufik 2017). methodology, sample selection and model speci- In examining the determinants of risk manage- fications. The fourth part of the paper refers to the ment model maturity, the authors find empirical research results, while the final part summarises the evidence in several studies that larger firms tend to paper’s main findings. adopt more mature risk management models (Hoyt SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 133 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H and Liebenberg 2008, 2011; Beasley, Clune, and future expectations. The only exception is the study Hermanson 2005; Pagach and Warr 2011; Farrell and by Beasley, Branson, and Pagach (2015), who use the Gallagher 2015). Some studies suggest that firms in cumulative abnormal returns after the announcement specific industries are more likely to adopt mature risk of the commitment of CRO. All of these studies were management models than others due to differences conducted for specific geographic areas or specific in regulatory requirements and risk awareness within industries within those areas. industries (Beasley, Clune, and Hermanson 2005; Golshan and Rasid 2012). For example, the banking and insurance industries are facing significant regula- 3. Research methodology tory pressure for integrative risk management due to solvency regulations through Basel III and Solvency The aim of this paper is to fill the gap represented II (Beasley, Clune, and Hermanson 2005; Gatzert and by the insufficient knowledge about the determinants Wesker 2012). Banks and insurance companies are of risk management in B&H firms and the impact of also in the focus of rating agencies. In addition, firms risk management on firm value. Accordingly, the fol- in the financial sector are particularly concerned with lowing hypotheses are tested: presenting an adequate and transparent risk manage- - H1: Firm size, industry sector, leverage ratio, and ment system in order to increase confidence in capi- type of auditor are determinants of more mature tal markets and expand funding sources (Hoyt and risk management models. Liebenberg 2008). - H2: Risk management in B&H joint-stock compa- Several empirical studies show a significant nies has a positive impact on firm value.. positive relationship between the adoption of a ma- ture risk management model and the choice of the In order to quantify the maturity level of risk man- firm’s auditor (Beasley, Clune, and Hermanson 2005; agement, a unique index for risk management was Golshan and Rasid 2012) and find that the auditor’s created. At the same time, the specific models were affiliation with the Big Four (KPMG, EY, Deloitte, or based on the OLS method for the cross-section. The PricewaterhouseCoopers) increases the likelihood of a index for measuring the maturity of risk management more effective risk management system (Golshan and models was created using the following formula: Rasid 2012). Financial structure, especially the lever- �� age, has been empirically shown to be a determinant of the maturity of risk management models, but with 𝐼𝐼 � �� ∙𝑐𝑐 �� � �� significant differences in the results in terms of signs. ��� Thus, while Hoyt and Liebenberg (2008, 2011) find a significant negative relationship between leverage where w , i = 1,2…31, are the aligned values of the i  𝑙𝑙𝑙𝑙 𝐼𝐼 � � �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥 �� � �������� � ���� and the risk management model maturity, Liebenberg weights of individual components in the model for and Hoyt (2003) and Golshan and Rasid (2012) find measuring the maturity of risk management of the � � 𝑙𝑙𝑙𝑙 𝑥𝑥 � � 𝑥𝑥 � � 𝑐𝑐 � 𝑙𝑙 ��𝑙𝑙 ������� ��   � �������� � ������� the opposite, positive relationship between these expert group, while c is the value of the i-th compo- in variables. nent on the n-th observation. The alignment process The relationship between risk management and is carried out through the implementation of Delphi market value is examined by Hoyt and Liebenberg techniques, while 31 𝑙𝑙𝑙𝑙����𝑙𝑙� componen � � � ts � have 𝑙𝑙𝑙𝑙 been 𝐼𝐼 iden �� ti- 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � �� � �������� � ���� (2011), Lechner and Gatzert (2018), Farrell and fied by Monda and Giorgino (2013) and include com- Gallagher (2015), Florio and Leoni (2017), Callahan ponents of organisational risk management culture, �� 𝑥𝑥 �� ln𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � ����� � �������� � ��� and Soielau (2017), Bohnert et al. (2019), who find a processes and organisational structure, whose impor- significant positive impact of risk management on the tance for effective and efficient risk management has �� 𝑥𝑥 �� 𝑥𝑥   � ������������ � ���������� value of the sampled companies. also been recognised by Zheng, Yang, and McLean McShane, Nair, and Rustambekov (2011) use five (2010), Lai and Shad (2017), and Lai and Samad (2010). � � 𝑙𝑙𝑙𝑙 𝑥𝑥 �� 𝑥𝑥 �� rating categories used by Standard and Poors and Farrel and Hoon (2009) argue that developing an or- � ������� �� �������� confirm a significant positive relationship between ganisational risk culture is essential and a necessary risk management and firm value. A positive but not element of implementation good risk management significant effect is found by Tahir and Razali (2011), practices. Risk management processes are, in essence, Li et al. (2014) and Sekerci (2015). In all studies, to ap- common to all international risk management frame- proximate shareholder value, Tobin’s Q indicator was works and range from objective setting, risk identifica- used as the ratio between the market value of the firm tion and assessment to risk treating, monitoring and and the sum of the book values of debt and equity, as reporting. Lundqvist (2015) appreciates that the con- a measure of generally accepted value that can reflect ceptual framework of mature risk management differs 134 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H from the traditional concept of risk management for a variable was logarithmic transformed in the initial management structure adapted to risk management model. Logarithmic transformation of independent processes and reflected in the structure, centralised continuous variables was performed to achieve better �� approach, established responsibilities and formalised linearity and model specifications. The model is spec - 𝐼𝐼 � �� ∙𝑐𝑐 �� � �� processes. ificated as follows: ��� Rowe and Wright (1999) state that the Delphi method, as a process of expert alignment of attitudes, 𝑙𝑙𝑙𝑙 𝐼𝐼 � � �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥 �� � �������� � ���� is based on four key elements: 1) anonymity of expert group members, 2) interactive decision making, 3) � � 𝑙𝑙𝑙𝑙 𝑥𝑥 � � 𝑥𝑥 � � 𝑐𝑐 � 𝑙𝑙 ��𝑙𝑙 ������� ��   � �������� � ������� controlled feedback, and 4) statistical aggregation of responsible groups that enables quantitative analysis wher   e x is industry affiliation variable as dum- industry and interpretation. Rowe and Wright (1999) also state my variable by assigning code 1 for companies in the 𝑙𝑙𝑙𝑙����𝑙𝑙� � � � � 𝑙𝑙𝑙𝑙 𝐼𝐼 �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � �� � �������� � ���� that for implementing this technique is necessary financial sector and 0 (zero) for companies in the non- to ensure a minimum of five experts. For the imple - financial sector. Companies in the financial sector, due �� 𝑥𝑥 �� ln𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   mentation of Delphi methods, in this research, eight to regulatory requirements, mainly aim to present an � ����� � �������� � ��� experts in the field of risk management from the ter - adequate and transparent risk management system ritory of B&H were formed, as follows: two representa- t o incr ease c onfidenc �� e in capital markets and increase 𝑥𝑥 �� 𝑥𝑥   � ������������ � ���������� tives of the academic community, one consultant, and sources of financing (Hoyt and Liebenberg 2008). five experts from practice. After the members of the lnx - The size of the company, measured by � � 𝑙𝑙𝑙𝑙 𝑥𝑥 �� 𝑥𝑥 �� size � ������� �� �������� expert group had been individually presented the the logarithmic size of the assets, is included in the objectives of the research, explained the procedure model because due to global trends, companies face of conducting the Delphi procedure, they were asked an increasing scope and complexity of risk (Nocco based on theoretical and practical experiences, to vali- and Stulz 2006). The principle of proportionality states date the identified components and determine their that larger companies face a more greater number of relative importance in the model through the process risks, resulting in the need for more sophisticated risk of adding weights. Although there are no universally management models (Hoyt and Liebenberg 2011). In accepted rules on the minimum level of consensus addition, larger companies can invest more financial, to be used, Sumsion (1998) proposes reaching 70 per technological, and human resources to implement cent consensus in each round. appropriate ERM programmes (Beasley, Clune, and The adopted consensus of experts for alignment Hermanson 2005; Golshan and Rasid 2012). of the values of individual c omponent weights is lnx - Financial leverage, as the log-ratio be- leverage achieved by consensus greater or equal to 75 per cent tween total liabilities and the book value of capital. on a single score (at least six identical answers out of The financial structure, especially leverage, was em- eight) as the first criteria. Also, the arithmetic aver - pirically found to be a determinant of the maturity age of weights reaching consensus in a narrow range of the risk management model, but with significant (± 10% of arithmetic mean in range) was used as the differences in the results in terms of signs. Reduction second criterion. In order to avoid creating a forced of default risk (Golshan and Rasid 2012) is quite an consensus instead of obtaining it spontaneously, acceptable and theoretical view that companies the arithmetic mean of the weights, if no consensus with mature risk management models may choose is reached based on the previous two criteria by the to increase leverage due to improved visibility into third iteration, was used after the third iteration. After risk (Hoyt and Liebenberg 2011). Risk management the implementation of each iteration, experts were activities enable companies to reduce debt costs by provided reports on the conducted iteration, where outlining corporate policies and strategies for risk they had the opportunity to see how other members management (Meulbroek 2002), contributing to more of the expert group proposed and then to change or favourable borrowing conditions. maintain their position. x - Type of audit as a categorical variable, auditor The OLS cross-sectional model was used to specify with two dummy variables, and the first one, in which the first empirical model used to determine the index code 1 (one) is assigned to companies whose last re- value determinants and test the first hypothesis. The port was audited by the auditor from the Big4 group choice of the model was conditioned by the fact that (Deloitte, PwC, Ernst and Young, KPMG), otherwise the dependent variable in the model is continuous, code 0 (zero), and another one, in which code 1 (one) namely the index for measuring the maturity of risk is assigned to companies whose last report was au- management created through a survey question- dited by some other audit company, otherwise code naire that was implemented in 2020. The dependent 0 (zero) is assigned. The reference variable represents SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 135 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H companies whose report has not been audited. One in suboptimal projects (Jensen 1986). Excessive lev- of the reasons for including this variable in the model erage, on the other hand, can increase bankruptcy. was theoretical and empirical evidence that auditors, Profitability control in the model was performed due especially from Big4 groups, are more diligent in au- to the fact that profitable companies could trade diting companies’ annual reports to preserve their higher returns on net assets and capital (Allayannis reputation (Tolleson and Pai 2011). Dummy variables and Weston 2001), achieving higher company value. for geographic diversification and international di- Industry diversification can affect company val- versification were used as control variables, as well as ues through economic mechanisms, broader access continuous variables for profitability and asset opac - to capital markets, and risk diversification (Lewellen ity, which could further affect the value of the index 1971; Teece 1980). On the other hand, diversification (Lechner and Gatzert 2018). The expected values of the can reduce performance if agency prices increase and variables included in the model are shown in Table 1. lead to inefficient business (Easterbrook 1984; Berger An additional OLS cross-section model was spec- and Ofek 1995). Consequently, the geographical di- ificated to measure the isolated effect of risk manage - versification of industry is included as a control varia- �� ment maturity on the firm’s value measured by Tobin’s ble of Tobin’s Q values. The theoretical predictions de- 𝐼𝐼Q. Ther � �� efore, in this model ∙𝑐𝑐 , as independent variables scribed for industrial and geographical diversification �� � �� are included created index as a measure of risk man- apply equally to international diversification. As is the ��� agement maturity, its significant determinants from case with industrial and geographical diversification, 𝑙𝑙𝑙𝑙 𝐼𝐼 � � �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥 the pr �� evious model and additional c � �������� � ���� ontrol variables international diversification is related to the costs they that could affect the dependent variable, value of have produced from unresolved agency problems � � 𝑙𝑙𝑙𝑙 𝑥𝑥 � � 𝑥𝑥 � � 𝑐𝑐 � 𝑙𝑙 ��𝑙𝑙 ������� ��   � �������� � ������� Tobin’s Q: leverage, profitability and dividend pay - and their benefits from economies of scale and risk ment, and the following model is specified: diversification. Furthermore, while some suggest that international diversification negatively affects Tobin’s Q (Denis and Yost 2002), there is also evidence that 𝑙𝑙𝑙𝑙����𝑙𝑙� � � � � 𝑙𝑙𝑙𝑙 𝐼𝐼 �� 𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � �� � �������� � ���� the effects of international diversification (Bodnar, Tang, and Weintrop 1997) are positive. �� 𝑥𝑥 �� ln𝑥𝑥 �� 𝑙𝑙𝑙𝑙 𝑥𝑥   � ����� � �������� � ��� Following a study by Allayannis and Weston (2001) and Lang and Stulz (1994), the indicator variable �� 𝑥𝑥 �� 𝑥𝑥   � ������������ � ���������� for dividend payout was included as a control vari- able. Empirical evidence on the relationship between � � 𝑙𝑙𝑙𝑙 𝑥𝑥 �� 𝑥𝑥 �� � ������� �� �������� dividend payout and company values is t wo-fold. Investors may view the payment of cash in the form The inclusion of these control variables was con- of dividends as a sign of exploitation of growth oppor- sistent with Lechner and Gatzert (2018), Hoyt and tunities, which may negatively affect the company’s Liebenberg (2003), and Bohnert et al. (2019). The value. In contrast, if dividends reduce free cash flows theoretical justification for including the control that could be used for excessive management spend- variable leverage is that the use of financial leverage ing, dividend payments could positively affect value could increase the value of firms by reducing free cash (Hoyt and Liebenberg 2003). flow that might otherwise be invested by a manager Table 1. Theoretically expected values of included variables in model 1 Variables Definition Theoretically expected value Industry affiliation variable + industry Size of the company, measured by the logarithmic lnx size size of the assets Logarithmic relationship between total liabilities lnx leverage and the book value of capital. Type of audit + auditor Source: Authors’ creation 136 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 3.1. Sample selection and data collection individual index components. After implementing the first iteration, the identified components for assess- The research was conducted with joint-stock com- ing the maturity of the risk management model were panies in B&H, i.e., companies with evident business validated, and the weights were aligned for the eight continuity, regardless of financial results. From the re - offered components. The second iteration resulted in cords of registers of both securities in B&H, we have the alignment of 10 components, while in the third it- eliminated companies in bankruptcy proceedings, eration, a consensus was reached on two components. liquidation, change of the organizational, legal form, Due to the visible overload of the expert group, the and those whose banking accounts are blocked. Due values of the other weights were determined by the to the specifics of financial reporting of investment arithmetic mean after the third iteration. Interestingly, funds, they are excluded from the research popula- the academic representatives of the expert group rec- tion. The structure of the research population is pre- ognised and gave greater importance to the compo- sented in Table 2. nents that were also recognised in previous research A questionnaire (available in the Appendix) asking as proxy indicators of more mature risk management. B&H companies to perform self-assessment on a scale The consensus reached at each iteration is shown in of 1 to 5 for each of the 31 components of the cre- Table 3. ated index was distributed to 579 previously collected In the structure of the index, the expert group email addresses of companies in the total population. ranked the components from the risk management We received 141 complete responses, resulting in a process segment the highest, with a total of 39.62 response rate of 24.35%. Secondary data for other weights, the organisational culture with 31.43 and variables in the specified models were collected from then the organisational structure with 28.61. Among the financial statements of the observed companies the individual components, the components in the or- for the year 2019. Data were collected through the ganisational structure, the establishment of a separate Bisnode business data service and financial reports function for risk management and the appointment that companies submit to the entity stock exchanges. of a chief risk officer have the highest values of the aligned weights. The management commitment component was 4. Results rated the most critical in the organisational risk cul- 4.1. Index of maturity of risk management ture segment, which is not surprising. Wibowo and As already methodologically presented, we have Taufik (2017) appreciate that implementing effective created an index using the Delphi technique, which risk management processes requires top manage- meant an iterative adjustment of the weight values f or ment’s strong and sustainable commitment to these Table 2. Research population Total number Excluded from research population cause: Total research of stock issuers bankruptcy, liquidation, blocked banking population in B&H accounts, and investment funds Federation of B&H 559 321 238 Republic Srpska entity 1,058 726 332 Brcko District of B&H 19 10 9 Total 1,636 1,057 579 Source: Authors’ creation Table 3. Consensus reached on iterations Number of components Consensus reached at iterations I iteration 8 25.80% II iteration 10 58.06% III iteration 2 64.52% IV- based on arithmetic mean 11 100.00% Source: Authors’ creation SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 137 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H processes. Zhao, Hwang and Low (2013) ranked this a segment of the risk management process, this com- component as the first item, appreciating that risk ponent is closely related to the other two components management goes precisely “top-down” direction. segments. In the segment of risk management processes, the An overview of the aligned weights of identified integration of risks into strategic and business plans components is given in the following table: got the highest value. Although identified as part of Table 4. Values of weights aligned by experts using Delphi technique Organisational Board of directors and top management commitment 4.92 risk culture Common risk language shared within the organisation 4.92 (31.43) Clear defining and communicating of a risk management policy 4 Organising learning programs for employees 3.06 Clear communicating of objectives, policies, and risk tolerance thresholds throughout 3 the entire organisation Sharing and communicating risk information 3 Risk appetite definition and an explicit risk-appetite statement 2.75 Definition of a risk tolerance threshold for each objective of the organisation 2.25 considering the risk appetite Integrating the risk management with the Performance Measurement System (PMS) 2.03 particularly with the Balanced Scorecard (BSC) Designing a remuneration and incentive system 1.5 Risk Integration of RM in the strategic and business plans 4 management Creation and maintenance of a risk register 3.759 process Properly using the technology as an aid to support risk management activities 3.5875 (39.62) Implementation of an efficient and effective process for identifying all relevant potential 3.06 risks Using qualitative and quantitative techniques in risk assessment formal process 3.06 Development of adequate contingency plans 3.03 Periodical repetition of the risk assessment process 3 Risk integration in a risk portfolio and evaluation of correlations between them 3 Defining treatment strategy (avoidance, reduction, sharing, retention), considering a 3 trade-off between costs and benefits, for each risk Existence of a periodic risk-reporting system 3 Risk classification into risk categories (e.g., strategic, operational, financial, and 2.625 compliance, or strategic, operational, financial, and hazards) Prioritisation of risks on a residual basis 2.5 KRI system developing for monitoring risk exposure and ensure it is coherent with KPIs 2 and firm strategy, inclusive with correction and escalation plans if risks exceed the limits Organisational Building a dedicated RM function 5 structure Appointment of a Chief Risk Officer (CRO) 4.95 (28.61) Involving all employees, at all levels, in the risk management process 3.625 Independence of the RM function (direct reporting of CRO to the Board or to the CEO) 3.5 Integration of the process of RM among all the business functions and unit 3.05 Designation of an RM group or team to support CRO’s job 3 Defining and communicating of roles and responsibilities for the management of risks 2.7875 Identifying risk owners responsible for the identification and management of each risk 2.7 Source: Authors’ calculations 138 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H By weighting the presented components, we At least 50% of the analysed companies had an have created an index based on 31 components. index value less than or equal to 250.93 index points Considering that the values of weights of individual (37.94 on a scale from 0 to 100). The company from components were determined by aligning of experts’ the activities of water supply, wastewater disposal and opinions based on the already mentioned criteria and waste management had the lowest value. The distri- that accordingly the value of some weights was deter- bution of the index is given above. mined on the basis of the arithmetic mean of 75% of proposed weights, the index ranges from 99.664 (for all answers 1) to 498.32 (for all values 5), and it is pos- 4.2. Determinants of the maturity of sible to scale it on a scale from 0 to 100. Descriptive risk management and the impact of risk statistics of the index is presented in Table 5. management on the value of companies Tables 6 and 7 present the elements of descrip- Table 5. Descriptive statistics of index tive statistics for the variables used in the specified models and the results of the first specified model, I I (0 – 100) respectively. RM RM Determinants of the created index are estimated Average 260.52 40.35 based on the specified cross-section model. Of the St. deviation 95.031 23.83 141 observations for which data were collected, eight Max 469.87 92.86 were identified as outliers. By keeping the outlier un- Min 99.664 0 der control, the result meets all the assumptions of the OLS model. Median 250.93 37.94 The p-value of the Ramsey reset test of 0.2155 Source: Authors’ calculations confirmed that the model was correctly specified. Homoscedasticity assumption of random error was The average value of the index is 260.52 points or satisfied and approved by the p-value of the Breusch- 40.35 points on a scale from 0 (zero) to 100. The high- Pagan homoscedasticity test of 0.3475. Also, the cor- est value of the index was recorded in the value of responding p-value of the SK-residual normality test 469.87 (92.86) and belonged to companies from the of 0.5633 was higher than the accepted error level, so financial sector. the residual normality hypothesis was not rejected. The values of the VIFs for all variables were less than 5, Figure 1: Distribution of index Number of companies 0‐20 20‐40 40‐60 60‐80 80‐100 Source: Authors’ creation SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 139 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H Table 6. Descriptive statistics Variables Mean Std.dev. Min. Max. Observations lnI Index RM 5.495 0.373 4.6 6.15 141 RM Industry 0.170 0.377 0 1 141 industry Size 16.144 2.178 11.76 21.95 141 lnx size Leverage -1.118 1.765 -5.62 2.58 141 ln x leverage Profitability 0.016 0.073 -0.24 0.42 141 lnx ROA Geographical 0.355 0.480 0 1 141 geogr.divers diversification International 0.603 0.491 0 1 141 int.divers diversification Auditor type - Big4 0.163 0.371 0 1 141 auditor_Big4 Auditor - others 0.659 0.475 0 1 141 auditor_other Opacity of assets 0.013 0.043 0 0.32 141 lnx opacity Source: Authors’ calculations Table 7. Estimated parameters of model 1 Dependent lnindex variable: Independent Coeff. Std.dev [95% interval] t P> | t | variables Constant 4.455 0.179 24.81 0.000* 4.100 4.811 Industry 0.371 0.058 6.35 0.000* 0.255 0.486 industry Company size 0.047 0.011 4.47 0.000* 0.027 0.069 lnx size Leverage 0.007 0.010 0.71 0.482 -0.013 0.028 lnx leverage Auditor type - Big4 0.307 0.077 3.99 0.000* 0.154 0.460 auditor_Big4 Auditor - others 0.272 0.050 5.38 0.000* 0.171 0.371 auditor_other Profitability 0.281 0.243 1.15 0.251 -0.201 0.762 lnx ROA Geographical 0.074 0.043 1.73 0.086*** -0.010 0.159 geogr.divers diversification International -0.059 0.040 -1.47 0.145 -0.139 0.021 int.divers diversification Opacity of assets 0.695 0.493 1.41 0.161 -0.281 1.672 lnx opacity Source: Authors’ calculations whereby all assumptions were met, and the estimated sector and type of auditor are determinants of more parameters met the criteria BLUE, the best linear un- matured risk management in B&H companies. biased estimators. The model explains 75.61% of the Table 8 presents the results of the estimated total variability of the dependent variable, which is model, the impact of the index on the market value of the coefficient of determination of the model. the company. The model was estimated on 107 obser- As the p-values for the variables of firm size, sector vations; how many of 141 companies that have been and type of auditor are less than the error level of 1%, collected data, are listed on the stock exchange, and statistical significance was confirmed at all conven- Tobin’s Q was used as an indicator of market value. tional levels of significance for these variables, which This model also satisfied the Ramsey reset test leads to the conclusion that with 99% certainty, we of the functional form (p-value = 0.5287). Keeping cannot reject the hypothesis that firm size, industry four outliers in the model under control resulted in 140 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H Table 8. Results of the estimated model of measuring the impact of RM on the value of Tobin’s Q Dependent variable: lnTobin's Q Independent Robust Coeff. t P> | t | [95% interval] variables Std.dev. Constant -1.194 0.920 -1.30 0.198 -3.022 0.633 lnI Index 0.337 0.202 1.66 0.099*** -0.065 0.739 RM Industry 0.027 0.169 0.16 0.872 -0.308 0.362 sektor Company size -0.069 0.026 -2.63 0.010* -0.121 -0.017 lnx size Auditor type - Big4 0.210 0.264 0.79 0.429 -0.315 0.735 auditor_Big4 Auditor - others -0.048 0.129 -0.37 0.709 -0.305 0.208 auditor_other Geographical -0.084 0.094 -0.89 0.375 -0.270 0.103 geogr.divers diversification Leverage 0.218 0.029 7.62 0.000* 0.161 0.275 lnx leverage Profitability 0.603 0.930 0.65 0.518 -1.244 2.451 lnx ROA International 0.099 0.094 1.06 0.292 -0.087 0.287 int.divers diversification Opacity of assets 0.563 1.092 0.52 0.608 -1.607 2.732 lnx opacity Dividend payments 0.033 0.117 0.28 0.779 -0.199 0.265 dividend Source: Authors’ calculations 5. Discussion and conclusion satisfying the residual normality assumption, and the p-value of the SK test was 0.5626. The residual normal- ity assumption cannot be rejected. VIF values also kept The creation of an index to measure the matu- values below 5 in this model, and the consequences of rity of risk management models, validated for this disturbing the heteroskedasticity assumption are pre- research by a group of experts in these fields, allowed vented by using White-Huber standard errors (Gujarati the quantification and ranking of companies in B&H 2003). The coefficient of determination of the model according to the maturity of the risk management was 61.91%, which explains the variability of the de- model and gives companies the opportunity to self- pendent variable. assess the risk management model. The proposed Based on the estimated model, the index as a index includes 31 components identified in the refer - measure of the maturity of risk management showed ence literature: Organisational Culture, Organisational explanatory power in explaining the variability of the Risk Management Processes, and Structure. Compared dependent variable Tobin’s Q, at an error level of up to to the reference study by Monda and Giorgino (2013), 10%. As the coefficient of the positive sign was esti- eight additional components were added to the in- mated with the index variable, and due to the p-value dex. The inclusion of these components enables a of 0.099, which is less than the error level of 0.10, we more comprehensive understanding of the risk man- did not reject the hypothesis of a significant positive agement approach in B&H companies. impact of risk management in explaining the value The results of the study show that the companies of companies. Also, next to it, the size variable had a in B&H do not have mature components of an inte- significant but negative sign in the model, which is grated risk management approach. The average value consistent with the findings of Allayannis and Weston of the created index on the scale from 0 to 100 was (2011) and Lang and Stulz (1994). The leverage varia- 40.35 points, while the highest value of the index was ble showed a significant positive effect on the value of 92.86 points and belonged to a company from the fi- Tobin’s Q. Due to the significance of the variable lnI , nancial sector. RM  on the value measure Tobin’s Q, we cannot reject the Although the maturity of risk management models hypothesis that the process of risk management in is generally low, the study results have revealed that joint-stock companies is in the function of creating larger companies and those coming from the financial their value.  sector have more mature risk management models. The company size as a determinant of the maturity SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 141 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H of risk management models is also confirmed in the empirical part of this paper. Despite the likelihood, papers of Hoyt and Liebenberg (2008, 2011), Pagach these limitations may have affected the results of this and Warr (2011), Farrell and Gallagher (2015) and study, it is assumed that their effects are marginal and Lechner and Gatzert (2018). Statistically, significant that they have not expressively influenced the find- more matured risk management models in the finan- ings and conclusions of this study. cial sector result from stricter regulatory requirements In methodological terms, further research can regarding risk management, thus guaranteeing a sta- be contributed through serious work on expanding, ble financial system, and is in line with the findings of developing and improving the scale for measuring Beasley, Clune, and Hermanson (2005), and Lechner the maturity risk management models. In addition to and Gatzert (2018). As a determinant of a more ma- the identified significant determinants, the existing tured risk management approach, the variable of au- model can be extended with additional variables to ditor types was also identified. Companies whose last improve its representative measures. The impact of financial report was audited by auditors from the Big4 risk management can be observed on some other firm group or some other audit firm had more matured risk performance, individually or integrated, in addition management models compared to companies whose to Tobin’s Q. Various statistical models and methods, financial statements were not audited in any way. The such as SEM, logit probit analysis and the like, can cer- same findings come from Golshan and Rashid (2012), tainly be used for this purpose. and Beasley, Clune, and Hermanson (2005), who con- firm a significant positive sign in front of the auditor type variable. 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Component: Management and the board of directors Board of directors and top management commitment are involved in the risk management process: Question: 5 - in all aspects and phases of manage- Assess the extent to which management and the board of directors are ment of all risks involved in the company’s risk management process: 4 - in all aspects and phases of manage- ment of the most critical risks 3 - partly for the most critical risks 2 - minimal 1 - not at all 2. Component: 5 - completely Common risk language shared within the organisation 4 - significant 3 - partially Question: 2 - minimal Assess the extent to which the company has implemented some of the 1 - not at all risk management standards (such as ISO 31001, COSO, FERMA, etc.): 3. Component: Policies and procedures are: Clear defining and communicating of a RM policy 5 - Fully defined for all risks 4- Fully defined for the most critical risks Question: 3 - Partially established policies and pro- Assess the extent to which the company has established risk manage- cedures for the most critical risks. ment policies and procedures in the company: 2 - There are no policies and procedures, but they are in preparation. 1 -There are no risk management poli- cies and procedures. 4. Component: 5 - monthly and more often Organising learning programs for employees 4 - quarterly 3 - semi-annually Question: 2 - annually Assess the extent to which the company implements professional 1 - not at all development and employee training programs to manage risks more effectively: 5. Component: 5 - completely Clear communicating of objectives, policies, and risk tolerance thresh- 4 - significantly olds throughout the entire organisation 3 - partially Question: 2 - minimal 1 - not at all Assess the extent to which RM objectives and policies are clearly com- municated through the company: SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 145 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 6. Component: 5 - fully implemented for more than Sharing and communicating risk information three years 4 - fully implemented up to 3 years Question: 3 - partially implemented Assess the stage of the process of implementing the company’s 2 - not implemented, but implementa- information system tion is planned in the coming period 1 - not implemented and there is no implementation plan in the coming period 7. Component: 5 - completely Risk appetite definition and an explicit risk-appetite statement 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which the company has articulated risk appetites in 1 - not at all the context of strategic planning: 8. Component: 5 - completely Definition of a risk tolerance threshold for each objective of the organi- 4 - significantly sation considering the risk appetite 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which risk tolerance thresholds are aligned with organisational objectives: 9. Component: 5 - completely Integrating RM with the Performance Measurement System (PMS), par- 4 - significantly ticularly with the Balanced Scorecard (BSC) 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the company’s risk management activities and policies are integrated into the performance measurement system: 10. Component: 5 - completely Designing a remuneration and incentive system 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which internal policies and procedures have 1 - not at all established incentives and rewards for employees for outstanding performance: Process 11. Component: 5 - completely Integration of RM in the strategic and business plans 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which the company’s risk management activities 1 - not at all and policies are integrated into strategic and business plans 12. Component: 5 - The risk register exists and is regu- Creation and maintenance of a risk register larly updated. 4 - The risk register exists and is updated Question: periodically. Assess the stage of the process of creating and maintaining a risk 3 - The risk register is being prepared. register: 2 - There is no risk register, but it is planned in the coming period. 1 - The risk register does not exist and is not planned in the coming period. 146 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 13. Component: 5 - completely Properly using the technology as an aid to support risk management 4 - significantly activities 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the implemented information system in the company ensures the integration of business processes: 14. Component: 5 - completely Implementation of an efficient and effective process for identifying all 4 - significantly relevant potential risks 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the process of identifying or reviewing po- tentially significant risks that may affect the achievement of objectives has been identified: 15. Component: 5 - quantitative and qualitative methods Using qualitative and quantitative techniques in risk assessment formal 4 - quantitative methods process 3 - qualitative methods 2 - subjective assessment of the Question: assessor Which methods does the company primarily use in risk assessment? 1 - none of the above 16. Component: 5 - completely Development of adequate contingency plans 4 - significantly 3 - partially Question: 2 - minimal Assess the extent to which the company has provided recovery plans to 1 - not at all ensure the operation of key operations in crisis situations: 17. Component: 5 - monthly and more often Periodical repetition of the risk assessment process 4 - quarterly 3 - semi-annually Question: 2 - annually Evaluate how often risk assessment is done in your company: 1 - not at all 18. Component: 5 - completely Risk integration in a risk portfolio and evaluation of correlations be- 4 - significantly tween them 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the integration of risk into the company’s risk portfolio and the assessment of the company’s risk linkage are carried out: 19. Component: 5 - completely Defining treatment strategy (avoidance, reduction, sharing, retention), 4 - significantly considering a trade-off between costs and benefits, for each risk 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which RM strategies are established for identified risks: 20. Component: 5 - monthly and more often Existence of a periodic risk-reporting system 4 - quarterly 3 - semi-annually Question: 2 - annually Assess how often the boards are reported on the company’s risks: 1 - not at all SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 147 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 21. Component: 5 - completely Risk classification into risk categories (e.g., strategic, operational, finan- 4 - significant cial, and compliance, or strategic, operational, financial, and hazards) 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which risk classification is carried out for the pur - poses of RM according to established criteria (strategic, operational, financial, compliance, etc.): 22. Component: 5 - completely Prioritisation of risks on a residual basis 4 - significant 3 - partially Question: 2 - minimal Assess the extent to which risk prioritisation is implemented in the 1 - not at all company: 23. Component: 5 - completely KRI system developing for monitoring risk exposure and ensure it is co- 4 - significant herent with KPIs and firm strategy, inclusive with correction and escala- 3 - partially tion plans if risks exceed the limits 2 - minimal 1 - not at all Question: Assess the extent to which recovery plans for providing key operations in crisis situations have been tested in the company: Organisational structure 24. Component: 5 - systematised and established func- Building a dedicated RM function tion/department for more than three years Question: 4 - systematised and established func- Assess at what stage is the establishment and construction of a dedi- tion/department for more than one cated function / department in charge of risk management year 3 - systematised and established func- tion/department shorter than one year 2 - systematized or non-established function 1 - a separate function/department is not systematised or established 25. Component: 5 - appointed general risk manager Appointment of a CRO more than three years ago 4 - appointed general risk manager Question: more than one year ago Assess the stage of the process of appointing the CRO: 3 - appointed general risk manager less than one year ago 2 - the general risk manager is in the process of selection 1 - no general risk manager has been appointed 26. Component: 5 - completely Involving all employees, at all levels, in RM process 4 - significant 3 - partially Question: 2 - minimal Asess the extent to which all employees at all levels are involved in the 1 - not at all RM process: 148 SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 RISK MANAGEMENT MATURITY, ITS DETERMINANTS AND IMPACT ON FIRM VALUE: EMPIRICAL EVIDENCE FROM JOINT-STOCK COMPANIES IN B&H 27. Component: 5 - completely Independence of RM function (direct reporting of CRO to board or to 4 - significant CEO) 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the independence and objectivity of the risk management function/department is ensured: 28. Component: 5 - completely Integration of the process of RM among all the business functions and 4 - significant unit 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which all business processes in the company have been identified and documented: 29. Component: 5 - appointed interdisciplinary teams Designation of a RM group or team to support CRO’s job more than three years ago 4 - appointed interdisciplinary team Question: more than one year ago Assess the stage of appointing interdisciplinary risk management teams 3 - appointed interdisciplinary team less that provide functional support in the work of the chief risk manager than one year ago and an understanding of all the company’s risks 2 - an interdisciplinary team to support the work of the chief risk manager is in the selection process 1 - there are no separate teams to assist the work of the chief risk manager 30. Component: 5 - completely Defining and communicating of roles and responsibilities for the man- 4 - significant agement of risks 3 - partially 2 - minimal Question: 1 - not at all Assess the extent to which the roles and responsibilities of all those involved in the risk management process have been identified 31. Component: 5 - designated process owners Identifying risk owners responsible for the identification and manage - 4 - RM department ment of each risk 3 - internal audit department 2 - finance/accounting department Question: 1 - no one in the company identifies the Indicate which of the following functions/departments is responsible for risk identifying and managing risks: SOUTH EAST EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS, VOLUME 16 (2) 2021 149

Journal

South East European Journal of Economics and Businessde Gruyter

Published: Dec 1, 2021

Keywords: Enterprise risk management; Tobin’s Q; OLS estimator; Delphi technique; questionnaire; B&H; G32; D81

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