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This paper examines the determinants and consequences of voluntary formation of risk management committees (RMCs) among financial institutions. The primary research question we address is whether RMC formation has a substantive effect on short-term risk outcomes and performance. Specifically, we determine whether RMCs are related to a short-term change in risk outcomes, a short-term change in hedging and trading derivative structures, and a short-term increase in profitability. We use a sample of financial institutions that voluntarily form a RMC in any year from 1994 through 2008 and a control sample of financial institutions that do not form a RMC during the sample period. The results provide evidence to suggest that financial institutions with international banking activity, higher leverage, a larger and more independent board, a Big N auditor, merger and acquisition activity, and lower financial reporting quality are more likely to form a RMC. Overall, our tests of risk outcomes and profitability do not provide consistent evidence of RMC formation being a substantive practice that results in operational and performance improvements. In contrast, our results are more consistent with RMCs fulfilling symbolic roles as an implication of institutional theory which focuses primarily on the perception of responsible risk management actions. Further, results are consistent with RMCs being used as a governance mechanism to help maintain and substantiate legitimacy over risk activities. |
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