ABSTRACT Approaches to risk governance are not homogeneous across organizations. Some organizations invest heavily in building formal and strategically focused enterprise-wide risk governance processes whereas others exhibit reduced formality and focus, allowing risk governance to be less structured. We argue that risk governance may best be described as a service dependent upon a network (or ecosystem) of participants who include users of risk information and providers who design and implement risk governance processes. Using a survey sample of 2,380 observations from 2011 to 2016, we find that external calls for enhanced risk governance are positively associated with risk governance processes having greater formality and strategic focus. We find this relationship is partially mediated by internal demands for enhanced risk governance. Further, we find that the positive association between internal demands and enhanced risk governance is reduced by resource constraints and that a risk-seeking attitude is negatively associated with enhanced risk governance. Data Availability: Contact the authors. JEL Classifications: G30; M10; M14; M40.

The speed of change, including the emergence of new technologies, geopolitical disruptions, and escalating environmental and social challenges create uncertainties that can trigger complex risks derailing an organization’s business model and strategic plan. None of these risks behave in isolation, highlighting the need for executives to monitor and manage a rapidly evolving portfolio of interconnected risks.

We report on the results obtained from ten annual surveys of global business executives on their perceptions of the most significant risks facing their organizations in the ensuing calendar year. These surveys of C-suite executives, directors and other risk professionals elicit their concerns about risks that may affect their organization’s success over the near-term horizon (i.e., the next calendar year). After a decade, we believe these results provide an opportunity to examine how the global risk landscape has evolved. In addition, two additional survey questions allow us to examine how these executives view the overall risk context and how enterprise risk management (ERM) is deployed and augmented in the face of an escalating risk environment. On average, we find that executives view the risk landscape they face as persistently risky over the ten-year period, even during the relatively robust economic environments for much of that time frame. Two industries report much more volatility in their risk environments, with respondents from the Healthcare sector and in Technology, Media and Telecommunications acknowledging the largest volatility. We also observe an increase in entities’ decisions to devote more time and resources to risk management over the ten-year period, suggesting that ERM has become an essential mechanism for organizational success. Our goal is to highlight the realities of constantly changing risk conditions and how context (e.g., industry and time) is an important distinguishing factor that affects an organization’s given risk profile, which is relevant to both executives and academics. Collectively, our findings emphasize the importance of understanding the ever-changing context of an organization’s environment, that risk identification must be an ongoing process, and that there is no “one-size-fits-all” approach to risk governance. We believe all this signals the importance of future research to help organizations respond with robust risk governance.

The U.S. Securities and Exchange Commission (SEC) requires companies it regulates to include disclosures about the board's role in risk oversight in the annual proxy statement to shareholders. The SEC does not mandate specific content or actions that boards should perform as part of their risk oversight responsibilities, leaving the nature of activities and extent of those disclosures to the discretion of the reporting entity. This study examines whether these disclosures contain substantive information reflective of the effectiveness of the organization's risk oversight. We find that organizations disclosing more specific information (but not simply more information) about board risk oversight practices are associated with firms independently assessed as having the strongest management and governance processes. These findings suggest that these firms use the discretion provided by the SEC's disclosure rule to provide substantive and potentially value-relevant information for stakeholders about the entity's risk management processes and board risk oversight activities. (c) 2020 Elsevier Inc. All rights reserved.

Over the past decade, expectations for more effective oversight of risks by boards of directors have significantly increased. These expectations emanate from stock exchanges, regulators, credit rating agencies and other key stakeholders. Proponents of enhanced risk oversight argue that an increased understanding of enterprise-wide risks provides strategic benefit by helping the board and management identify and manage risks that may impact the achievement of strategic objectives while at the same time helping the board monitor the extent of risk-taking on the part of management in their desire to meet these objectives. In response to these growing expectations, some boards have asked management to embrace a more holistic, top-down approach to risk oversight widely known as enterprise risk management (ERM) while others have not. Little is known about the way in which boards and management organize their processes and the impact of those processes on the level of ERM adoption. More importantly, little is known about the extent to which ERM is perceived to provide strategic benefit to those organizations that have invested in developing a robust ERM process. Based on data gathered from over 750 survey responses from executives of organizations spanning a number of industries and sizes, we find that organizations with greater ERM maturity are significantly more likely to have taken steps to formally engage the board and senior management in specific risk oversight tasks, and certain board and management risk practices are associated with perceptions that ERM provides strategic advantage.

We examine the forecast accuracy of Value Line analysts relative to the Brown-Rozeff (100)X(011) 4 ARIMA model. We find that for a surprising percentage (35-41%) of our sample of small firms that time series-based earnings per share predictions are more accurate than those obtained from The Value Line Investment Survey. Further, we document exploitable characteristics of each subgroup that are associated with forecast origin. In those instances where the seasonal, univariate earnings forecast model identified by Brown and Rozeff (1979) produces more accurate forecasts than Value Line, we find significant differences in firm size, degree of diversification, magnitudes of the autoregressive and seasonal moving-average parameters, residual standard errors, and magnitude of the Ljung-Box Q-statistic. We use probit regressions to identify ex ante those firms likely to be accurately forecast by each source. We achieve a marginal improvement in forecast accuracy, which suggests there is potential for using ex ante decision rules to improve forecast accuracy.

This paper examines the effect of intra-industry "earnings informativeness" and proprietary firm information on variation in security analyst coverage within industries. Earnings informativeness is defined as the extent to which privately developed or obtained information about one firms' earnings provides useful information about the earnings of its industry co-members. Proprietary information provides signals concerning future firm profitability, relative to industry competitors, resulting from such factors as new product developments and innovations in production processes. The results reveal that levels of analyst coverage relative to mean levels of industry-specific analyst interest is significantly positively associated with intra-industry earnings informativeness and size-adjusted annual research and development expenditures (a proxy for proprietary firm information). The findings also show that certain determinants of analyst coverage (e.g., firm size and institutional ownership) identified in the prior literature as explaining variation in aggregate analyst following also hold at the industry level. Finally, the paper examines whether the model variables found to possess explanatory power within industries can also serve to explain observed variation in inter-industry levels of analyst interest and the results suggest that they can.

EXECUTIVE SUMMARY * Expectations for improvements in how boards and senior executives oversee enterprisewide risks are on the rise. The authors surveyed more than 700 organizations in September 2008 to better understand the current state of enterprise risk oversight. This article provides a brief overview of key findings from that research and identifies potential opportunities to strengthen risk oversight. * Organizations have traditionally tackled risk oversight by managing individual "risk buckets" or silos. The survey found that 44% of the respondents have no enterprisewide risk management process in place and they have no plans to implement one. An additional 18% of respondents without ERM processes in place indicated that they are currently investigating the concept, but they have made no decisions to implement an ERM approach to risk oversight at this time. * The two most common perceived barriers to ERM implementation were the existence of competing priorities within the organization and insufficient resources to devote to an ERM implementation. Despite the barriers, 75% of the organizations indicated the board of directors is asking senior executives to increase their involvement in risk oversight at least moderately. * A majority of organizations who delegated risk oversight to a committee of the full board assigned that responsibility to the audit committee (55%). Other committees that were reported with some frequency were the executive committee of the board (21% of responses) or a separately established risk committee (18%). * Steps for improvement include: information gathering to identify the top five-to-10 risk exposures the organization is likely to face in the next three to five years; reconciling the top risk exposures with existing risk management activities already ongoing within the organization; and prioritizing any newly identified unmanaged risks. ********** As the result of fallout from the ongoing economic crisis, failures associated with existing risk management processes are already generating calls for reform and increased regulatory scrutiny SEC Chairman Mary Schapiro said in an April 2009 speech to the Council of Institutional Investors that "the Commission will be considering whether greater disclosure is needed about how a company--and the company's board in particular--manages risks, both generally and in the context of setting compensation." In July 2009, the SEC issued its first response through proposed rules that expand proxy disclosure information about the overall impact of compensation policies on the registrant's risk taking and the role of the board in the company's risk management practices. Proposals in Congress call for the establishment of board risk committees composed of independent directors, among other reforms. [ILLUSTRATION OMITTED] Credit rating agencies such as Standard & Poor's have also focused on an organization's risk management processes, providing an additional incentive for organizations to consider further enhancement of existing risk oversight infrastructure. Without a doubt, expectations for improvements in how boards and senior executives oversee enterprisewide risks are significantly on the rise. The question is whether organizations are currently in a position to respond with more robust, enterprisewide risk oversight. To provide answers to this question, in September 2008 the authors surveyed more than 700 organizations whose 2008 revenues ranged from $14,950 to $115 billion--with a median for the sample of $50 million--to better understand the current state of enterprise risk oversight. This article provides a brief overview of key findings from that research, Report on the Current State of Enterprise Risk Oversight, and identifies potential opportunities to strengthen risk oversight. EXPECTATIONS FOR TOP-DOWN, HOLISTIC VIEW OF RISK While organizations have managed risks for centuries, most have traditionally tackled risk oversight by managing individual "risk buckets" or silos. …

[ILLUSTRATION OMITTED] EXECUTIVE SUMMARY * More companies are placing oversight responsibility for risk management with the board of directors. While embracing this responsibility, boards are also finding that better risk intelligence is a significant aid to their strategic planning responsibilities. * In many companies, boards are assigning the additional task of risk oversight to the audit committee. Audit committees (or other board committees) charged with risk oversight are placing demands on management for more information about risk management processes and for up-to-date information about management's assessment of key risk exposures. * The volume and complexities of risks affecting the enterprise continue to expand. In response, many boards have adopted ERM as a process to develop a more robust and holistic top-down view of key risks facing the organization. * Because an ERM approach to risk management involves a top-down view of risks, leadership from senior executives is a critical component to an effective ERM process. The CFO is uniquely positioned to lead the overall enterprise risk management effort. * Most experts argue that internal audit's role should be to monitor the effectiveness of ERM processes designed and implemented by senior management. * Audit committees are also exerting pressure on their external auditors to share risk information they glean from audits of financial statements, and the audit of internal controls over financial reporting for publicly traded entities. * Implementing ERM is an evolutionary process, whereby risk oversight improves over time. ********** Recent events such as the massive trading losses at Societe Generale, the subprime lending crisis and product recalls associated with Mattels international toy manufacturing operations continue to shock financial markets and negatively impact shareholder value. These events have also fostered rising expectations for boards of directors to exert greater oversight of their organizations' risk management processes, leading in turn to the growth of enterprise risk management (ERM) as a strategic planning tool. Not only are key stakeholders pressuring boards to get a better handle on management's process for identifying, assessing and responding to specific risks, but stakeholders are also expecting boards to more effectively anticipate far-horizon risk exposures and to continually monitor those risks to ensure that strategic and operational decisions remain aligned with the organization's risk appetite. In response, more companies are turning to ERM. BOARD'S ROLE IN RISK OVERSIGHT Deloitte's Global Risk Management Survey (5th edition) reports that 70% of financial institutions participating in the survey place oversight responsibility for risk management with the board of directors, up from 59% in 2004 and 57% in 2002. This increase was due in part to emerging regulations, such as the New York Stock Exchange's 2004 Final Corporate Governance Rules that require audit committees to discuss and monitor risk management processes and Standard & Poor's 2007 proposed scoring of ERM quality as part of the rating agency's credit evaluations (see description in Exhibit 1). Exhibit 1 Governance Expectations for Board Risk Oversight 1. Excerpt from the NYSE's 2004 Final o orate Governance Rules (1) Among numerous other responsibilities, duties and responsibilities of the audit committee include: (D.) discuss policies with respect to risk assessment and risk management; Commentary: While it is the job of the CEO and senior management to assess and manage the company's exposure to risk, the audit committee must discuss guidelines and policies to govern the process by which this is handled. The audit committee should discuss the company's major financial risk exposures and the steps management has taken to monitor and control such exposures. …

Although prior research documents an inter-temporal decline in earnings relevance for equity investors, precise evidence has not been collected on why the decline has occurred. We document a substantial decline in the persistence of quarterly accounting earnings over a 35-year period for a sample of New York Stock Exchange firms. Our findings hold regardless of whether firms are in industries with dramatic increases in spending on information technology through time or not. Further, neither ex ante measures of expected economic change (changes in barriers-to-entry and product type) nor an ex post measure of economic change (quarterly sales persistence) decline inter-temporally for our sample firms.

According to SAS No. 56, Analytical Procedures, the use of disaggregate, individual location data can improve the effectiveness of analytical procedures used in multilocation audits. Using a case-study approach, we investigate whether improvements in the accuracy and precision of account balance expectations can be obtained by using disaggregate, individual location data in a large, multilocation company. Specifically, we examine two issues: (1) whether the summation of individual location expectations generates more accurate and precise expectations of company-wide account balances than expectations based on company-wide data only and (2) whether the accuracy and precision of analytical procedures is enhanced by including peer location observations of the account balance in individual location expectation models. We find that for the multilocation company examined in this case study the summation of individual location account balance expectations is not more accurate or precise than an expectation derived from aggregate models unless the individual location models include peer location observations of the account balance. When the individual location models include the same account observations from other peer locations within the company, the company-wide account balance expectations developed from disaggregate models are more accurate and precise (less variable) than expectations developed using aggregate, company-wide data only. The results from this case study indicate that when auditors are generating expectations of company-wide balances, disaggregate models incorporating peer location account observations provide account balance expectations that are both more accurate and more precise than company-wide, aggregate models. Given the limitations of a case-study approach, future research should be directed at establishing the generalizability of these findings.

Accounting researchers (and potentially others) generally select rather simple, lower-order, time-series models to develop proxies for earnings persistence. However, measures of persistence produced by such models are not related to characteristics of the firm's economic environment that are expected to influence earnings persistence. Using a sample of 162 calendar year-end New York Stock Exchange firms, we document the cross-sectional relations between a set of relatively constant, firm-specific, economic characteristics that are theoretical determinants of persistence and measures of earnings persistence derived from both lower-order and higher-order Autoregressive, Integrated, Moving-Average (ARIMA) models. When lower-order ARIMA models are used to generate measures of earnings persistence, the cross-sectional regression models measuring the association between persistence and economic determinants of persistence yield very low adjusted R2s. In sharp contrast, when differenced, higher-order ARIMA models are used to measure earnings persistence, adjusted R2s are in the 10–12 percent range. Moreover, independent variables such as capital intensity, barriers-to-entry, and product-type are all significant in the directions suggested by economic theory. Our results are consistent with Lipe and Kormendi (1994) who argue that higher-order ARIMA models do a better job of capturing the valuerelevance of current period earnings than lower-order models.

According to SAS No. 56, Analytical Procedures, the use of disaggregate, individual location data can improve the effectiveness of analytical procedures used in multilocation audits. Using disaggregate data obtained from a multilocation company, we examine two issues: 1) whether the accuracy and precision of analytical procedures is enhanced by including contemporaneous observations of the account balance in the prediction model, and 2) whether expectations developed using disaggregate data are more accurate and precise than expectations based on aggregate data only. We find that the contemporaneous models are consistently more accurate and precise and that the summation of individual location account balance forecasts based on disaggregate, contemporaneous models are superior to expectations developed using aggregate, company-wide data only. The results indicate that when auditors are generating expectations of company-wide balances, that disaggregate, contemporaneous models will provide predictions that are both more accurate and more precise than company-wide, aggregate models.

AbstractThis paper examines the security market response to the announcement of sell‐side analysts' decisions to initiate coverage of a firm. We examine the market reaction to the initiation announcement and the accompanying investment recommendation, by disaggregating our sample based on existing analyst coverage at the announcement date. We find, on average, a significantly larger, positive stock price reaction to buy recommendations conveyed in announcements of coverage initiation for firms with a small existing analyst following compared to such announcements for firms receiving no prior analyst coverage.Tests show that the relation between the extent of preexisting analyst coverage and market response is nonlinear and concave down in shape. Specifically we find that lightly followed firms, on average, experience larger price reactions to announcements of coverage initiations than either previously uncovered firms or more heavily followed firms. We test for and find that this result holds over a range of definitions of light coverage and is not attributable to the presence of an underwriting relationship existing between the analyst's employer and the firm receiving coverage.We do find that initiations by analysts named to Institutional Investor magazine's “All‐American Research Team” produce a significantly larger market reaction than do initiations by non‐All‐American security analysts. In addition, similar to the market response associated with other types of information events, we observe that proxies for the richness of the initiated firms' preannouncement information environment are associated with event‐day average abnormal returns.

This paper examines the security market response to the announcement of sell-side analysts' decisions to initiate coverage of a firm. We examine the market reaction to the initiation announcement, and the accompanying investment recommendation, by disaggregating our sample based on existing analyst coverage at the announcement date. We find, on average, a significantly larger, positive stock price reaction to buy recommendations conveyed in announcements of coverage initiation for firms already followed by other financial analysts compared to such announcements for firms with no prior analyst following. Tests show that the relation between the extent of preexisting analyst coverage and market response is non-linear and concave down in shape. Specifically, we find that lightly followed firms, on average, experience larger price reactions to announcements of coverage initiations than either previously uncovered firms or more heavily followed firms. We test for and find that this result is not attributable to the presence of an underwriting relationship existing between the analysts' employer and the firm receiving coverage. We do find that initiations by analysts named to Institutional Investor magazine's "All-American Research Team" produce a significantly larger market reaction than do initiations by non All-American security analysts. In addition, similar to the market response associated with other types of information events, we observe that proxies for the richness of the initiated firms' pre-announcement information environment are associated with event day average abnormal returns.

Financial analysts provide information to support investment analysis and decisions for an ever increasing number of firms. As part of their services they also produce earnings forecasts for covered firms. While there has been much research investigating the determinants of financial analyst earnings forecast superiority for large, widely-followed firms, little research has focused on smaller firms. Until recently, these smaller firms have been largely ignored. This study focuses exclusively on small firms and provides evidence of differing behavior for such firms compared to results previously reported for large firms, Errors in quarterly earnings per share forecasts of small firms obtained from a univariate time-series model are also examined. Regression results indicate that time-series model parameters possess information content with respect to forecast accuracy for analyst-covered firms only. These results are obtained after controlling for firm size, model adequacy, and industry, quarter, and year effects. This suggests that analysts are more likely to cover small firms for which they are able to decipher information correlated with that impounded in the ''shocks'' in the quarterly earnings time series as captured by the time-series model parameters.