Risk and risk management: a historical review and research agenda

This paper aims to compile and improve the current understanding of risk, risk management, risk lexicon, and enterprise risk management (ERM) and summarise theoretical and empirical research regarding the relationship between risk management and firm value by summarising over a hundred publications from the domain of risk understanding, typology of risk, the evolution of risk management and firm performance, and enterprise risk management. This literature review suggests that better risk management should lead to better risk-taking and not just risk reduction and finds strong theoretical and empirical evidence that risk management leads to improved firm valuations and performance while reducing cash flow uncertainty and return volatility. The literature review validates the positive relationship between risk management and firm value. Firms with sound risk management practices experience higher valuations and lower costs of financial distress. Evidence suggests that ERM has significant potential for wealth creation and cost mitigation.