Kennesaw State University DigitalCommons@Kennesaw State University Doctor of Business Administration Dissertations Coles College of Business Fall 9-25-2015 The Effects of Risk Management Programs on Financial Professionals' Judgments James F. Boyle Follow this and additional works at: http://digitalcommons.edu/dba_etd Part of the Accounting Commons Recommended Citation Boyle, James F., "The Effects of Risk Management Programs on Financial Professionals' Judgments" (2015). Doctor of Business Administration Dissertations. This Dissertation is brought to you for free and open access by the Coles College of Business at DigitalCommons@Kennesaw State University.
It has been accepted for inclusion in Doctor of Business Administration Dissertations by an authorized administrator of DigitalCommons@Kennesaw State University. For more information, please contact digitalcommons@kennesaw. THE EFFECTS OF RISK MANAGEMENT PROGRAMS ON FINANCIAL PROFESSIONALS’ JUDGMENTS by James F. Boyle A Dissertation Presented in Partial Fulfillment of the Requirements for the Degree of Doctorate of Business Administration In the Coles College of Business Kennesaw State University Kennesaw, GA 2015 Copyright by James F.
Boyle 2015 DEDICATION I dedicate this paper to my mother Ann Marie Boyle, who passed away on February 22, 2015. Her undying and unconditional love has been a constant inspiration to me and her encouragement throughout my life has given me confidence to believe that I can achieve whatever I set out to do. iv ACKOWLEDGEMENTS I would like to thank my children Jimmy, Nicholas, Mary, and David for their love, encouragement, and patience as I pursued my doctorate degree. “You’re going again?” was a common question at my house each month as I packed my suitcase to travel to Atlanta from Scranton.
I am also grateful to my father for the love and care that he gave to my children while I was away. I would also like to thank my brother Douglas for generously providing me with expert guidance and continued support from the time I applied to Kennesaw State University through completion of this work. His graduation from the Kennesaw State University DBA program as a member of Cohort 1 and his successful transition into academia offered a clear model for me to follow. I already heard remarkable things about my dissertation chair Dr.
Dana Hermanson before I entered into the KSU doctorate program. These early positive perceptions about Dana were confirmed and exceeded by my personal experience working with him. His brilliance as a researcher is documented by his vast record of academic and practitioner journal publications, but his equally impressive teaching and mentoring skills must be experienced to be fully appreciated. I also have been fortunate to have had Dr.
Todd DeZoort on my dissertation committee and Dr. Jennifer Schafer as my reader. I have learned and developed from the steady guidance and insightful feedback from Todd and Jennifer and I am very appreciative to them both. v I am also grateful to Dr.
Neal Mero and Dr. Torsten Pieper for their competent and committed leadership of the DBA program. Joseph Hair for sharing his expert knowledge and for challenging me to learn statistical methods that will benefit me in my future as a researcher. I am grateful to Dr.
Divesh Sharma for patiently explaining accounting research and for sharing his incredible knowledge. I am also very appreciative of the many other highly-qualified and committed faculty and visiting scholars that I have been privileged to know and to learn from as a Kennesaw State University DBA student. Finally, I would like to thank all of my fellow DBA students in Cohort 4 for their friendship and encouragement, and for listening to me talk about the dinner special at Cracker Barrel. Thank you Bright, Caroline, and Scott for your great teamwork in working through the accounting course assignments.
Thank you Carole for helping me to learn SPSS and SEM software (and for moving the truck in AMOS!). Thank you John for your friendship and for letting me ride with you to the airport. Thank you Scott Ambrose and Alex for your friendship and for occasionally sharing a much-needed drink. vi ABSTRACT THE EFFECTS OF RISK MANAGEMENT PROGRAMS ON FINANCIAL PROFESSIONALS’ JUDGMENTS By James F.
Boyle Despite the present focus in practice on enterprise risk management (ERM), academic studies have not responded to the question, “How do risk management programs (RMPs) influence the business decisions of financial professionals?” This study addresses this issue by examining the effects of RMPs on the levels of judgment conservatism and effort exercised by financial professionals. Specifically, in a 2 x 2 between-subjects experiment using experienced financial professionals as participants, I manipulated RMP type (i., robust or ceremonial) and financial risk level (i., high or low). The study examines the effect of RMP type and the interaction of RMP type and financial risk level on the degree of conservatism and effort of financial professionals’ business decisions. A robust RMP receives strong support from senior management and board members, who then hold financial professionals accountable for the level of financial risk that they assume in making business decisions.
A ceremonial RMP lacks any real or substantive management or board support, but exists primarily to provide an appearance of a functioning and regulatory compliant RMP. Risk management interview studies (Viscelli, 2013; Cohen et al., 2015) support the relevance of robust (agency theory) versus ceremonial (institutional theory) perspectives from risk management practitioners. vii Contrary to prediction, no significant relationship was found between RMP type or the interaction of RMP type with the financial risk level and either the degree of financial professional judgment conservatism or effort. However, a significant relationship between the financial risk level alone and the degree of financial professional judgment effort was found.
These findings remain unchanged after adding to the model various possible control variables reflecting participants’ demographics and experience. Thus, the results of this study provide no evidence that a robust versus a ceremonial RMP significantly impacts financial professionals’ decisions about whether to make project investments or the amount of time or the extent of consultation needed for them to decide. Additional analyses revealed significant relationships between RMP type or investment size and other dependent variables. These results offer important implications for practitioners and policymakers, as well as contribute to academic research about new applications of accountability and agency theories.
viii TABLE OF CONTENTS Title Page……………………………………………………………………………….i Copyright Page……………………………………………………………………………ii Signature Page……………………………………………………………………………iii Dedication………………………………………………….vii Table of Contents…………………………………………………………………………ix List of Tables…………………….x List of Figures…………………….xii Chapter 1 - Introduction………….………………………………………………………1 Chapter 2 - Literature Review and Hypotheses Development…………….………………………………32 Chapter 4 - Data Analysis and Results…………….51 Chapter 5 - Conclusion, Implications, Limitations, and Future Research…………….…86 Appendix A - Institute of Management Accountants First, Second, and Third Request.92 Appendix B - Copy of Case Instrument………………………………………………….96 ix LIST OF TABLES Table Page 1 2 x 2 Experimental Design and Expected Cell Sizes……………………….33 2 Instrument Flow………………………………………………………………36 3 Fully Completed Experiments (88 Total Participants)……………………….50 4 Fully Completed and Passed All Manipulation Checks (60 Total Participants)……………………………………………………….52 5 Realistic and Understandable Case 0-100 Scale Variables………………….53 6 Demographic Information……………………………………………………54 7 Descriptive Statistics…………………………………………………………55 8 Descriptive Statistics – By Experimental Cell……………………………….56 9 Independent Samples Test……………………………………………………56 10 Descriptive Statistics – General Risk-Taking Propensity Scale…………….58 11 Descriptive Statistics – Other 0-100 Scale Variables……………………….59 12 MANOVA Model Results……………………………………………………62 13 ANOVA Results (Judgment Conservatism)………………………………….66 16 List of Possible Control Variables……………………………………………67 DV = Extent Board of Directors’ Attitude toward Risk Management Affected Recommendation: 17 ANOVA Results…………………………………………………………….70 DV = Extent Top Managements’ Attitude toward Risk Management Affected Recommendation: 19 ANOVA Results…………………………………………………………….72 DV = Extent Feel Accountable to Board of Directors for Risk Associated with Recommendation: 21 ANOVA Results…………………………………………………………….73 x DV = Extent Feel Accountable to Top Management for Risk Associated with Recommendation: 23 ANOVA Results…………………………………………………………….75 DV = Extent Believe Top Management is Risk Averse: 26 ANOVA Results…………………………………………………………….………………………………………77 xi LIST OF FIGURES Figure Page 1 Risk Management Program Type/Financial Professional Judgment Experimental Model…………………………………………………………….8 2 Financial Professional Judgment Showing Predicted Interaction Between RMP Program Type and Financial Risk Level……………………………….31 xii CHAPTER 1 INTRODUCTION Enterprise risk management (ERM), which advocates an organization-wide risk management approach over the traditional methodology of addressing risks individually, has received considerable attention from U. corporate management and board members since the issuance in 2004 of Enterprise Risk Management – Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2004). ERM focus renewed after the financial crisis of 2007-08, which was followed by market and regulatory actions aimed at restoring the public trust in U. corporations to effectively manage organizational risks.
In 2008, Standard & Poor’s began to include an assessment of ERM as part of its criteria for evaluating public companies’ credit ratings (Standard & Poor’s, 2008). Securities and Exchange Commission (SEC) required all U. public companies to disclose their board of directors’ oversight role over risk management (SEC, 2010). In addition, recent internal auditor surveys (IIA, 2010; PwC: 2011, 2013) have identified risk management as a new top focus of the internal audit function.
In 2013, the New York Stock Exchange (NYSE) corporate governance standards were expanded to require audit committees of U. public companies to discuss the firm’s risk management process and major financial risk exposures (NYSE, 2013). Despite this widespread attention on ERM in practice, the research literature lacks studies that address the effects of risk management programs on business decisions of 1 2 financial professionals. McShane et al.
(2011: 642) highlighted that, “Driven by the intense flurry of government and stock exchange activities related to risk management within corporations, trade and business publications directed at top management are full of articles related to ERM, yet academic research in the area is still rare.” Because financial professionals are responsible for approving a firm’s significant investing and financing activities that are essential to support organizational growth initiatives, it is important to study ERM’s possible impact on financial professionals’ willingness to take reasonable risks in making business decisions. The results of empirical studies that examined the relationship between ERM and firm value have been mixed for financial services and insurance industry companies. For example, Hoyt and Liebenberg (2011) find a positive relationship and McShane et al. (2011) find no relationship between ERM and firm value for studies of U.
McShane et al. (2011: 653) ask, “Why does a strong or excellent ERM rating not lead to higher firm value? Is it possible that a strong ERM culture constrains firm growth that gets reflected in its market value?” COSO (2004) indicates that the purpose of ERM is to manage organizational risks to provide reasonable assurance of achieving firm objectives, which ultimately focus on creating value for shareholders. Therefore, ERM (as a proxy for a robust RMP) may be “good” (i., value creating) for an organization to the extent that any resulting conservative risk judgments are balanced with and remain within the limits of the organization’s healthy, entrepreneurial “risk appetite.” In other words, a willingness to take reasonable financial risks consistent with the achievement of entity objectives is “good.” However, ERM (as a proxy for a robust RMP) may be “bad” (i., value diminishing) to the extent that any resulting conservative risk decisions are not balanced 3 with but rather end up constraining the organization’s healthy, entrepreneurial “risk appetite.” In other words, an unwillingness to take reasonable financial risks consistent with the achievement of entity objectives is “bad.” The possibility of this latter case appears to have prompted the question about whether “a strong ERM culture constrains firm growth that gets reflected in its market value” (McShane et al. The present study addressed these questions by examining the effects of ERM on the levels of conservatism and effort exercised by financial professionals while making business decisions.
Specifically, in a 2 x 2 experiment using experienced financial professionals as participants, I manipulated risk management program (RMP) type (i., robust, agency theory approach to risk management, or ceremonial, institutional theory approach to create legitimacy) and financial risk level (i., high or low, as reflected by a relatively large or relatively small financial investment) randomly between-subjects. I then examined the effect of RMP type and the interaction of RMP type and financial risk level on the degree of financial professionals’ judgment conservatism and effort.