THE IMPACT OF ENTERPRISE RISK MANAGEMENT (ERM) ON FIRM PERFORMANCE: EVIDENCE FROM LISTED BANKS IN COLOMBO STOCK EXCHANGE

Abstract

There is considerably higher pressure and specialize in regulation towards Enterprise Risk Management (ERM) to decrease the brutal consequences of a future crisis. However, there is no regulatory framework representing ERM practices and also though some companies have such frameworks it is not mandatory for all the businesses in Sri Lanka. Thus, this study examines the impact of ERM on Performance of listed banks by using secondary data collected from annual reports over the 10 years from 2009 to 2018 in 16 listed banks in the CSE. The study used panel data regression analysis to examine the effect of ERM based on managing financial risk, managing liquidity risk, managing market risk and managing credit risk on the performance. The results of the fixed firm effect model show that the Financial Leverage, Loan to deposit ratio (LDR), and Loan Loss Provision Ratio (LLP) had positive significant impacts on ROE while Net interest margin (NIM) had a negative impact on ROE. Further, the firm size and current ratio could not show any statistically significant impact on firm performance. Financial leverage and NIM had negative significant impacts on ROA while LDR had a positive significant impact on ROA. Whereas, firm size, current ratio, non-performing loan ratio (NPL), and LLP are not statistically significant. These findings signal corporate managers to focus on cost-benefit considerations when designing and implementing ERM practices. Decision-makers, future and potential investors, econometricians, academics and other stakeholders can refer this study for strategic planning, cost controlling, related academic studies, taking decisions on managerial implications of the economy and banking sector.