Enterprise Risk Management and Firm value: Evidence of Indonesia before and during Covid-19

. This research paper aims to investigate whether there is a relationship between the implementation of Enterprise Risk Management (ERM) and the firm value of listed companies in Indonesia, specifically at the time of crises. A sample of non-financial Indonesia listed companies during the period before the Covid-19 pandemic (2019) and during the Covid-19 pandemic (2020) were used to investigate this relationship. According to this study’s findings, our results indicate that in the circumstances before the Covid-19 pandemic there was a significant negative relationship between ERM implementation and company value. During the Covid-19 pandemic, we find no significant association between ERM implementation and company value because Indonesian companies’ financial performance has experienced a decline. Our results suggest that companies should continue to improve their ERM implementation and investors can use this as a consideration for investing. Limited time period and prior research have become a limitation to our research as by the time of the research, the pandemic is still ongoing.


Introduction
Companies frequently deal with uncertain environments in achieving their goals.Enterprise Risk Management (ERM) is an internal-driven tool that requires companies to systematically understand their overall risks so that they can manage them [7].By implementing ERM, companies can increase their knowledge of risk at the aggregate level to efficiently carry out their operational activities and obtain optimal profit.Consequently, positive financial results will lead to increasing corporate value [1,2,3].
The Covid-19 pandemic is an example of the uncertainty condition that provides an interesting setting to examine the relationship between ERM and a company's value.The pandemic crisis had an impact on the world's economy.It has caused many companies to face high risks to go bankrupt due to their inability to meet short-term and long-term obligations.During such a crisis, companies that can identify, manage, and mitigate their risks effectively will have a higher probability to survive in facing the pandemic [14,15].
There have been many studies that investigate whether companies that implemented ERM will be superior in increasing companies' value.However, the results are still not conclusive.Some studies find a positive relationship between ERM and firm values [8,9,10].While other studies find no relationship [11] or even a negative relationship to firm value [12,13].
The purpose of this study is to investigate the relationship between ERM implementation and firm value in Indonesian listed companies, specifically in times of the pandemic COVID-19 crises.Indonesia offers an * Corresponding author: hkurniawati@binus.eduinteresting setting to investigate this question for several reasons.First, Indonesia was a country that experienced economic effects due to COVID-19.COVID-19 made Indonesia to experience a mobility limitation and caused a decline in investment from 3.25% to 1.94% which also affected the economic downturn in Indonesian companies [17].Additionally, this leads to the emergence of termination of employment, which is brought on by the company's inability to pay the salaries that ought to be paid.As a result, this decline caused many companies to go bankrupt.Lastly, although there is no specific regulation regarding risk management disclosure in Indonesia, some Indonesian companies have voluntarily adopted ERM.Since it is still not mandatory, the prior study indicates that in practice ERM reporting and implementation is low in Indonesia [18].In such a voluntary regime, the value of ERM implementation would be relevant.
To test our hypothesis, we use a sample of nonfinancial Indonesian listed companies during 2019 and 2020.First, we regress Tobin's Q measurement of firm value on a dummy variable whether a company is reporting ERM implementation or not in its annual report, and a set of control variables for the whole sample.Next, we are also interested to examine whether the relationship between ERM and firm value will be different in times of crisis.To examine this, we recode the year 2019 as a period before the Covid-19 pandemic and the year 2020 as the period during the Covid-19 pandemic (2020) and run the regression with additional variables of Covid time and the interaction between ERM and Covid time.
Our results show that the relationship between ERM and firm value before the Covid-19 pandemic was significantly negative, while during the Covid-19 pandemic, the relationship between ERM and firm value was not significant.The results of this study are in contrast to [8,9,10] which state that ERM and company value are positively related.
Our study contributes to the debate regarding the value relevance of ERM by providing evidence of how ERM negatively affects firm value and is not significantly related, both before and during the Covid-19 pandemic.This study aims to contribute to the development of scientific fields related to the effect of ERM disclosure on firm value.The results of this study are expected to offer a new understanding and references about the importance of ERM in companies.We hope that the results of this study can also be used as management reference material in evaluating risk management related to company value.

Literature review and hypothesis development
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2004 define Enterprise Risk Management is "a process within a corporate entity that is influenced by the board of directors, management and other entity personnel, and is applied in setting strategy and throughout the company, designed to identify potential events that could affect the entity, and manage risk appetite to match that risk appetite, to provide reasonable assurance regarding the achievement of the entity's objectives" [19].ERM enables companies to identify and find the optimal way to manage risk, thus reducing the possibility of negative surprises, increasing positive results, making effective use of resources, thus enhancing corporate resilience [20].
The focus of ERM is on the coordination and strategic allocation of the company in overcoming risks to minimize variances [21].ERM function is to model, measure, analyze, prioritize, and respond to types of risk, such as operational and reputational risk within a company's coordinated and centralized framework [22,23].Furthermore, ERM facilitates efficient communication among internal divisions and lessens information asymmetry, thus, companies can improve decision-making processes [24].By managing the risks as a whole, the company is expected to perform better and ultimately be able to increase shareholder value [2,11].
Prior studies regarding the relationship between ERM implementation and firm value have shown mixed results.For example, [2] find support for the proposition that ERM is value creating.They argue that ERM helps companies to decide on the most profitable investment opportunities based on the identification of potential risks.It makes companies able to choose projects that are feasible to invest in so that they can result in increased corporate value when capital allocation is efficient [25,26].
Yet, other studies find no or negative relation between ERM program and firm value.[11] find no support for the proposition that ERM creates value, while [13] find strong negative correlation between ERM and firm's value.They argue that risk management disclosures can damage company value [13] since its implementation process can be very complex [27] and costly [5,11].The value and usefulness of ERM is not sufficiently understood only through repeated trial-and-error, experimentation, and the accumulation and consolidation of knowledge [28].In addition, companies' managerial structure plays an important role in the value creation of ERM programs.If managers act without full consideration, such as underestimating the difficulty and cost of running and maintaining an ERM program and overestimating their ability to combine strategies and risks in adopting the program, ERM can become very expensive.Furthermore, ERM programs can introduce an additional layer of bureaucracy due to a lack of integration.Hence, there is a possibility that the opportunity costs and operating costs that arise when carrying out the ERM process have the potential to destroy company value [13].Therefore, we find it worthwhile to empirically test the following hypothesis: H1: There is a relationship between ERM and firm value in Indonesian listed companies.
During the crisis, companies faced even more uncertainties.The Covid-19 pandemic has forced companies to new risk scenarios and adverse impacts, such as delays in resources and materials [29,30,31].Implementing ERM enables companies to be more prepared in developing their strategies to cope with these risks [14].Thus, companies became increasingly aware that ERM implementation is important especially during a crisis/pandemic that leads to increasing companies' value [15].
However, [32] found that the relationship between ERM and company value was not significant during the Covid-19 pandemic, which means that there was no difference in company value between companies that had implemented ERM and companies that had not implemented ERM.These results are seen from the 2020 stock price index where the stock price has decreased so that the implementation of risk management does not have a significant effect in adding to company value.Therefore, we find it worthwhile to empirically test the following hypothesis: H2: There is a relationship between ERM and firm value during the COVID-19 pandemic.

Research design and data collection
To investigate the relationship between ERM implementation and firm value we utilize the following regression model: Our dependent variable is Q, the company value measured by Tobin's Q, calculated by the sum of the company's market value of equity and book value of liability deflated by total assets.Our variable of interest, ERM, is the enterprise risk management implementation, a dummy variable indicating whether a company implements ERM.Following prior studies [2,22], we manually search these keywords and phrases in corporate annual reports: "enterprise risk management," "strategic risk management," "corporate risk management," "consolidated risk management," "holistic risk management," "integrated risk management," "risk management committee," "risk committee," and "chief risk officer" (CRO) to determine the existence of ERM implementation.If these keywords or phrases are found, ERM takes the value 1, indicating that ERM has been implemented.Conversely, ERM takes a value of 0 if keywords weren't found, which indicates that there isn't an ERM implementation in the firm.
Consistent with prior literature, we include several control variables [2, 4 ,6, 7, 33, 34, 35, 36, 37, 38, 39, 40,41,42,43,44,45,46,47,48,49].Leverage, LEV, can have a substantial impact on a firm's value, both positive and negative as explained in several literature regarding firm value.According to [2], a high level of leverage might raise the likelihood of bankruptcy and force the company to spend extra costs as a result of worsening financial circumstances.On the other hand, a low level of leverage can increase firm value by the fact that leverage reduces the free cash flow that selfish managers are likely to invest in sub-optimal projects [2].The measure that the researchers use in calculating leverage is the financial leverage index, which is the ratio of total debt to the total assets.
QUICK defined as cash plus short-term investments divided by current obligations is a measure of liquidity.Prior literature suggests that companies with high liquidity are more likely to invest, which can lead to improved performance [50,51].Hence, the relationship between liquidity and firm value is expected to be positive.Next, ROA is used as an indicator of the success of the company's operational activities, measured by the ratio of net income to the company's total assets.Higher profitability will trigger the company to develop in a better direction, maximizing the company's value and eliciting favourable reactions from investors.ROA should be connected to increasing firm worth via a positive capital market value [2,10].Therefore, a positive relationship is expected between ROA firm values.INVOPP is the investment opportunities, calculated by the ratio of the capital expenditures to total sales.Companies with large investment opportunities have bright prospects and lead to a favourable effect on their stock price [36,37,38].Hence, we expect a positive relationship between INVOPP and firm value to be positive.
We include the variable BODSIZE and BODIND to control corporate governance effect [39,42,52].Board is crucial in carrying out the company's strategy, identifying and managing risks, and providing adequate confidence in the achievement of company goals.BODSIZE is measured by the size of BOD members whereas BODIND is calculated as percentage of independent directors [4,6,39,40,41,42].However, BOD size can have a positive or negative effect on firm value, so the expected results are still ambiguous.According to [53], BOD size can maximize company performance since the larger the number of BOD the higher the controls and monitoring of the condition of the company [54].However, if the number of board members increases too much, then the company will face a lot of debate due to misunderstandings and tend to be slow in making decisions, resulting in a decrease in company value [41,55].Regarding BOD independence, a high number of BOD independence results in better quality financial information and more conservative corporate accounting which has a positive impact on firm value [56,57].On the other hand, an increase in members of BOD independence has a negative impact on firm value because the board of directors consisting with a higher percentage of BOD independence pays a higher salary to management [58].We also control for SIZE, the size of the firm, measured as the natural logarithm of total assets at the end of the year.[2,19,35] explain that there is a negative relationship between firm size and firm value because the larger the firm size, the lower the efficiency of the process of monitoring the company's operational activities, resulting in a decrease in firm value.Conversely, the larger the size of the firm, the more companies can use their market power to increase profits [59,60] and be better prepared to face economic changes [61].Therefore, based on prior literature, firm size can have a positive or negative effect on firm value.
CFVOL, cash flow volatility is calculated by the standard deviation of cash flows from operating activities divided by total assets [62,63].According to [43], cash flow volatility can produce underinvestment problems that reduce firm value.In addition, cash flow volatility might decrease investments in capital expenditure and R&D costs, which results in expensive external funding [64].It is expected that CFVOL is negatively related to firm value.
Next, we include SGROWTH to control for the firm's growth opportunities, measured by sales growth over the year.Companies that have high sales growth will be more profitable, demonstrating the ability to offer investors high returns while also raising the value of the company [2,7,34,45].According to the prior literature, the researchers predict growth opportunities have a positive relationship with firm value.
Last, AGE is measured by the logarithm of difference between the year of implementation and the year the company listed in the stock exchange [46,47,48,49].Related to this control variable, the researchers expect that the firm age variable has a positive influence because companies that are established earlier carry out superior governance practices.This assumption is supported by developments in how companies carry out governance that have developed significantly in recent years [8].Table 1 presents in detail the variable definition.

Data collection and sampling procedure
Except for the data of ERM, all the data were retrieved from the Bloomberg database.Table 2 summarizes our sample selection process.We begin with the set of Indonesian listed non-financial companies over the period of 2019 to 2020.The initial sample consisted of 553 companies per year, for a total of 1,106 company-year observations.We exclude observations with incomplete annual reports for the period of 2019 and 2020 (150 company-years).Further, we dropped observations with missing variables (118 company-years).This resulted in our final sample of 838 company years over the period of 2019 to 2020.Table 3 shows the sample breakdown by year and industry.

Descriptive statistics
Descriptive statistics are presented in Table 4.All continuous variables were winsorized at the 1st and 99th percentiles.The descriptive statistic of full samples can be seen in Table 4 panel A. In 2019-2020, 38.31% companies implemented ERM.Overall, the implementation of ERM in Indonesia is still in the development stage.Tobin's Q displays wide variation across companies from 0.384 to 8.986.ROA has a positive average of 0.019 with a minimum value of -0.170 and a maximum of 0.193.
Next, we partition our sample into before and during the crisis.Descriptive statistics of the two sub-samples can be seen in Table 4 panel B. The results of the descriptive statistics show that there is a slight increase in the number of companies that implement ERM before (37.95%) and during (38.66%) the pandemic.This increase indicates that companies in Indonesia tend to be more aware about ERM and its role in mitigating risks.As expected, there is also a significant decline in their financial performance specifically in ROA, SGROWTH, INVOPP during the crises.

Regression analysis
Table 6 shows the results from our regression analysis.Table 6 (1) provides a full sample regression analysis with only control variables.Consistent with prior literature [2,19,35,37,38], the coefficients of ROA and INVOPP are significantly positive while the coefficients of SIZE and AGE are significantly negative.This result suggests that the more profitable and greater investment opportunities of companies tend to have higher shareholder value while larger and older companies are associated with lower companies' value.Other variables do not show evidence of relationships.
Table 6 (2) is the regression result with the ERM variable.The control variables consistently show similar results to that of Table 6 (1).The coefficient of ERM is significantly negative indicating that the implementation of ERM is viewed as a decreasing value by the investors.This result is consistent with [13].Table 7 shows the results from our regression analysis.Table 7 shows the regression results to analyze whether COVID-19 pandemic influences the relationship between ERM and Q.The sample was divided into two subsamples that include all observations before (2019) and those during the COVID-19 pandemic.From Table 7 (1), (2), and (3) the control variables (ROA, SIZE, AGE, INVOPP) have consistently similar results.Table 7 (1) is the regression result for the subsample before COVID-19.The coefficient of ERM is significantly negative.
In Table 7 (2) it can be seen the regression results of subsample during COVID-19.The coefficient of ERM in Table 7 (2) does not show significant evidence of relationship to Q.This result explains that when investors decide to invest, investors prioritize information about financial performance rather than information about risk management so that the investors do not pay much attention to ERM as a reference in making investment decisions.Our result is in line with [11].
Table 7 (3) is the regression results of the interaction of ERM and COV time.It shows that ERM has a coefficient of -0.345 with a significant value of 1%.This result consistent with [13] in their analysis shows ERM displays a negative correlation with firm value.This consistently negative effect of ERM on firm value suggests that even in pandemic times when companies are facing more uncertainties, ERM implementation is still perceived as a costly strategy by investors and destroys firm value [13].The cov variable is the Covid-19 variable, which shows that the Covid-19 pandemic has no significant effect on firm value.The ERM*COV interaction variable has a weak positive coefficient value.

Conclusion
The purpose of this study is to investigate the effect of ERM on the value of Indonesian non-financial companies, especially in the period before and during the Covid-19 pandemic.Our results show that ERM has a significant negative effect on the firm value of Indonesian non-financial companies which indicates that ERM implementation is still in the initial stage and is perceived by investors as an expensive strategy.Even during a pandemic, when companies are in the most need of risk management, ERM is not able to give a positive signal to investors that the company can handle operational risk problems and reduce the impact of risks that will be faced to achieve business goals.
From our research, the result shows that companies should consider implementing risk management that is more integrated and comprehensive, such as establishing a committee specialized in risk management or appointing a Chief Risk Officer (CRO).From the point of view of the government and regulator, promoting and supporting ERM through regulatory frameworks can help improve ERM adoption and implementation in Indonesia.As for investors, implementation of ERM can be one of the considerations for investment decisions in evaluating the company risk profile and mitigating potential risk.
Our results suggest that implementation of ERM should be taken seriously and comprehensively with full consideration of potential difficulties and the costs of running the process.Companies should also carefully consider the value creation process of ERM implementation.Moreover, limited periods and prior research have become a drawback for our research as by the time of the research the pandemic is still ongoing.Hence, our research results may not precisely capture the long-term impacts of ERM implementation on firm value and limited access to theories specifically in this topic.For researchers who will conduct further research related to ERM on firm value, it is expected to be able to extend the research period and expand the sample.Researchers hope that future studies will explain further

Table 3 .
Sample breakdown by year and industry.In table 3, the sample is broken down by year, industry, and age.The table demonstrates that there are no issues with our final sample being over or underrepresented in particular years, sectors, or ages when compared to the initial sample.
Notes: *Initial sample of all Indonesian listed non-financial companies over the 2019-2020 period; Industry groups are based on Indonesia Stock Exchange (IDX) retrieved from Bloomberg

PRE-COV (2019) COV (2020) t-test z-test Mean Std. Dev Median Mean Std. Dev Median
For variable definitions: seeTable I; The t-test is used to test the null hypotheses that the mean values are equal; The ztest is used to test the null hypothesis that both distributions are homogeneous; *, **, *** indicate a two-tailed significance at the 10, 5 and 1% threshold, respectively.

Table 5
shows Pearson correlation between the variables.There is a negative correlation between ERM and Q, and a positive correlation between financial performance variables (ROA, QUICK, LEV, SGROWTH, and INVOPP), and Q. SIZE and AGE show negative correlations.There are no symptoms of multicollinearity between variables.Refer to Table5below.
E3S Web of Conferences 426, 02051 (2023) https://doi.org/10.1051/e3sconf/202342602051ICOBAR 2023 the impact of ERM on firm value in another country and what are the variables that influence it.