ANALYZING THE IMPACT OF EFFECTIVE RISK MANAGEMENT: INNOVATION AND CAPITAL STRUCTURE EFFECTS

AbstractIn our turbulent times effective risk management capabilities differentiate firms and influence performance outcomes. There is mounting recognition that effective risk management is reflected in adaptive responses that enable the firm to cope with sometimes abrupt environmental changes and not just an aim to circumvent adverse economic effects from identified hazards and market disruptions. It captures an ability to exploit opportunities as well as avoiding adverse economic effects. Hence, we use real options logic to argue that effective risk management capabilities can improve performance and is enhanced by innovation and financial slack. This proposition is examined on a sample of 896 companies. The study finds that risk management effectiveness is positively related to performance and the relationship is enhanced by investment in innovation and lower financial leverage. These results underscore the importance of innovation policies and capital structure decisions as firms deal with change and uncertainty.