DETERMINANTS BEHIND ADOPTING ERM: A CASE OF EGYPT

Abstract

The main aim of this study is to investigate, and perform an empirical inquiry of, factors that impact a company’s choice to adopt an Enterprise Risk Management (ERM) system in Egypt. The current paper focuses on a sample of 86 top corporations listed on the ―Egyptian Stock Exchange‖. A logistic regression model is created to test the hypotheses. Results suggest that size (Ln market capitalization), profitability (ROA), liquidity (current ratio), corporate governance (being listed on S&P/EGX ESG index) and belonging to some industry sector are possible positive drivers for ERM adoption. Nevertheless, leverage (debt to equity ratio) has a negative relationship to ERM engagement while growth (growth in book value of equity) has no effect on the implementation of ERM by the sampled companies. Contrary to prior literature, the current study revealed a positive impact of liquidity and profitability on the corporation’s decision to apply an ERM system. Originality of the current paper lies in the following. It adds to the empirical literature on drivers of ERM deployment. In addition, these reasons are examined in a new context; Egypt, which is not presented in the prior literature. Moreover, in contrast with prior literature, Corporate Governance is proxied by a comprehensive measure, namely, being listed on S&P/EGX ESG index, which covers environmental awareness, social responsibility, and other corporate governance practices. paper hypothesize that several corporate characteristics accounting-related indicators affect the implementation of ERM. Hence, a number of possible drivers of ERM adoption were chosen and their impact was empirically examined. These chosen explanatory factors are firm size, industry, liquidity, leverage, governance. Empirical evidence suggests that the following factors are possible drivers for, and positively impact, ERM implementation in Egyptian listed companies: further contextual variations in the determinants of an ERM programme could be revealed by larger and more international samples.