International Journal of Business and Management; Vol. 13, No. 1; 2018 ISSN 1833-3850 E-ISSN 1833-8119 Published by Canadian Center of Science and Education 225 The Impact of Enterprise Risk Management on Firm Performance: Evidence from Sri Lankan Banking and Finance Industry Kingsley Karunaratne Alawattegama 1 School of Management, Huazhong University of Science and Technology, Wuhan, China. Correspondence: Kingsley Karunaratne Alawattegama, School of Management, Huazhong University of Science and Technology, 1037 Luoyu Rd, Hongshan Qu, Wuhan Shi, Hubei Sheng, China, 430073. Email: karunratne@gmail.com Received: November 28, 2017 Accepted: December 12, 2017 Online Published: December 20, 2017 doi:10.5539/ijbm.v13n1p225 URL: https://doi.org/10.5539/ijbm.v13n1p225 Abstract This study explores the impact of the adoption of enterprise risk management (ERM) practices on firm performance. A sample of forty five banking and finance companies listed on the Colombo Stock Exchange (CSE) was selected for this study and uses both primary and secondary data for the empirical analysis. The extent of adoption of ERM practices was assessed by using the ERM integrated framework of committee of sponsoring organization (COSO) of the Treadway Commission of USA. Return on equity (ROE) is used as a proxy to measure the firm performance and uses multivariate regression analysis to assess the impact of key ERM functions on firm performance. This study finds none of the eight key ERM functions suggested by the COSO’s ERM integrated framework has a significant impact on firm performance. Event identifications, risk assessment, risk response and information & communication indicate a positive impact on firm performance. However, none of those impacts were significant. Surprisingly, empirical evidence reveals that objective setting; event identification, control activities and monitoring of ERM functions have a negative, but not significant, impact on the firm performance. These findings induce the corporate managers to pay a close attention to the cost-benefits considerations when designing and implementing ERM practices and not heavily relied upon and extensively invest on ERM as a vehicle for creating firm value. Keywords: Chief risk officer, enterprise risk management, firm performance, firm value, internal controls, return on equity, risk committee 1. Introduction Amidst the global economic crisis (1998, 2008), high profile corporate scandals and business failures such as Barings Bank (1995), Enron (2001), WorldCom (2002), the emerging concept of enterprise risk management (ERM) has been widely discussed by the academia and the practitioners in the recent past. ERM has been highly considered by today’s corporate managers as a strategic approach to managing risk face by business firms in a holistic way as oppose to traditional silo-based risk management. Despite there is a growing concern on the adoption of ERM practices with the key objective of enhancing firm value, there is little empirical evidence supporting the value relevance of the ERM implementation. Prior researchers have made some attempts to empirically verify the relationship between ERM and firm performance and find mixed results about the value relevance of the ERM implementation. Many of the prior researchers (Liebenberg & Hoyt, 2003; Beasley et.al 2008; Hoyt et. al, 2011, Hoyt et al. 2008, Pegach et al. 2008, Pegach et al. 2010, Pegach et al. 2011, Tjahjono, 2017) use dummy variables such as, the presence of the; chief risk officer (CRO), risk committee, big four auditors and institutional shareholders to assess the extent of ERM implementation by business firms. There are some criticisms of this approach and some researchers suggest dummy variables could not effectively assess the extent of ERM adoption by the business firms. Hoyt et al. (2008), suggests the researchers are required to find more robust models for assessing the extent of ERM implementation. Based on the direction of prior researchers (Hoyt et al, 2008; Tjahjono, 2017) this study uses real variables to assess the extent of adoption of ERM using a robust model suggested by COSO’s ERM integrated framework. This study explores the extent of ERM adoption by the listed companies in the Sri Lankan banking and finance industry where it is presumed, in line with the prior researchers’ works (Hoyt et al,