Evaluating the Relationship Between Enterprise Risk Management and Financial Reporting Disclosure Quality

Posted: Sep 14, 2011

• Mateo Brown
• Mateo Garcia
• Mateo Jones

Abstract

This research investigates the complex relationship between enterprise risk management (ERM) implementation maturity and financial reporting disclosure quality, introducing a novel methodological framework that combines computational linguistics with risk management maturity assessment. Unlike previous studies that primarily rely on survey-based ERM measurements, our approach develops a comprehensive ERM maturity index derived from corporate disclosures, regulatory filings, and risk management documentation. We analyze a unique dataset of 450 publicly traded companies across multiple sectors over a five-year period, employing natural language processing techniques to assess both ERM sophistication and disclosure quality simultaneously. Our findings reveal a non-linear relationship where moderate ERM implementation yields diminishing returns on disclosure quality, while advanced ERM systems demonstrate significant positive effects. The study introduces the concept of 'risk transparency efficiency' as a novel metric for evaluating how effectively organizations convert risk management efforts into meaningful disclosure practices. Results indicate that industry context moderates this relationship substantially, with financial institutions showing different patterns than manufacturing or technology firms. This research contributes to both academic literature and practical applications by providing a more nuanced understanding of how risk management sophistication translates to reporting quality, offering insights for regulators, investors, and corporate governance professionals seeking to enhance financial transparency through improved risk management practices.