An Analysis of Relationship between Enterprise Risk Management and Economic Value Added

Abstract

Background: As businesses face increasingly complicated and unpredictable situations, Enterprise Risk Management (ERM) has become increasingly popular. Although the potential for ERM to enhance the performance of an organisation is widely recognised, its precise magnitude continues to pose a challenge.

Purpose: The paper proposes a theoretical model that connects vital ERM components to EVA. Successful ERM practises, according to the model, reduce risks, enhance operational efficiency, and optimise capital allocation, all of which contribute to increased EVA and shareholder value.

Methods: To examine the impact of ERM implementation on the performance of firms as measured by Weighted Average Cost of Capital (WACC) and Net Operating Profit After Tax (NOPAT), the research establishes four regression models. This approach yields insights that can be applied universally and a comprehensive understanding of the mechanisms through which ERM influences EVA.

Results: The results offer positive effect that there is positive relationship between EVA and ERM implementation. According to the findings of the research, the implementation of ERM in Indian businesses significantly reduces the WACC and increases the NOPAT.

Originality/Value: This study makes a substantial contribution to the current corpus of knowledge regarding ERM and performance measurement. The results of this study offer significant insights for businesses aiming to improve their ERM procedures and optimise shareholder value. Furthermore, this study establishes a foundation for subsequent investigations that examine the intricate relationship between ERM and diverse facets of organisational effectiveness.