Enterprise risk management quality and financial distress in African firms: insights from firm heterogeneity

Purpose This study investigates the effect of enterprise risk management quality (ERMQ) on financial distress (FD) and firm-level attributes underlying this relationship among sub-Saharan African (SSA) firms. Design/methodology/approach Over a 7-year period (2014–2020), the study examines ERMQ of 203 firms located in 12 African countries. The formulated hypotheses were tested using both the least square dummy variable (LSDV) two-way panel fixed effects and logistic regression estimators. Findings The empirical analysis reveals that the relationships between ERMQ and FD measures are positive and statistically significant and negative and statistically significant with the likelihood of FD. These results suggest that firms with high-quality ERM tend to reduce the severity and likelihood of FD. The main results remain robust to alternative FD, components of ERMQ, sub-samples and channel analysis, and generalised methods of moments (GMM) for endogeneity concerns. Practical implications This study imply that shareholders and creditors should mandate investee firms to invest in top-notch ERM systems to reduce managerial opportunism to align principal (shareholders and creditors) and agent (managers) interests. For policymakers, this study suggests that they should legislate on ERM adoption for non-financial firms. This will improve risk governance, reduce the incidence of corporate bankruptcies and promote financial and economic stability among non-financial companies. Originality/value This paper adds an emerging market perspective to the ERM literature by offering evidence that SSA firms implementing top-notch ERM systems are insulated from the adverse consequences of FD. Although previous studies have investigated the effects of ERMQ on critical firm outcomes, it is still unclear the mechanisms through which ERMQ addresses FD in emerging market settings.