The Impact of Enterprise Risk Management on Financial Performance: Exploring the Mediating Role of Business Strategies

Abstract

This study investigates how implementing enterprise risk management (ERM) affects the financial performance of non-financial firms listed on the Pakistan Stock Exchange (PSX). The analysis was based on the COSO ERM framework and utilised a multiple mediation mechanism. Additionally, the study explored whether business strategies such as cost leadership (CLS) and differentiation strategy (DS) mediate the relationship between ERM and financial performance. The research employed a questionnaire survey as the preferred methodology. 340 surveys were gathered via mail questionnaires, targeting top-level management and executives of non-financial firms. The collected data underwent analysis using the PLS-SEM technique. The results revealed that the implementation of ERM components exerted a substantial influence on business strategies. Moreover, these strategies exhibited a significant impact on the financial performance of the firms. Furthermore, the study uncovered that both the CLS and DS significantly mediate the relationship between ERM and financial performance. The outcomes of this research offer valuable insights to non-financial enterprises, enabling them to better comprehend their ERM implementation. Additionally, the findings serve as a guide for identifying areas of enhancement for organisational culture, processes, structure, and infrastructure within each ERM component. Additionally, this research adds to the body of knowledge concerning the significance of effective governance on risk within the context of risk management in non-financial firms. Future studies could be extended to sectors like the public sector, manufacturing, textile, and SMEs. These studies could aim to assess how ERM influences financial performance.