Existence and separation of risk management committee: Determinants and mediating effect on performance

This study examines the mediating effect of existence and separation of risk management committee (RMC) on the relationship between ownership structures, ethnicity, female directors, Shariah compliance and firm performance in the context of Malaysia business environment. This study used secondary data obtained from the annual report of nonfinancial firms listed in the Bursa Malaysia from 2015 to 2017 with 2,173 firm-year observations. A multiple regression was employed to test the mediation using the Baron and Kenny method as well as the Sobel Test. The findings revealed that ownership structure (namely family, government, managerial and foreign), ethnicity and female directors are significantly associated with the establishment of RMCs and these results are robust to multiple additional analyses. This study also revealed that there is a positive significant relationship between the existence of RMC and market performance of firms. The finding supported that, an RMC signals to investors and outsiders that the firm has applied good corporate governance practices thus lead to increase in the performance of the firm. In contrast, it is documented that separate RMC does not enhance the market value of firms. Moreover, the mediation model reveals that the existence of an RMC partially and significantly mediates the relationship amongst the family, government, managerial, foreign, ethnicity, female directors, and firm performance (proxy by Tobin’s Q). The findings of this study support the importance to have an RMC in a firm in order to assess and disclose more information regarding the risks that exist in the firm, which in turn, can increase firm value. Therefore, this study provides empirical evidence on the determinants of RMC in Malaysia and also the importance of the existence and effectiveness of RMCs in enhancing the firm performance, which will be useful for investors, policymakers, regulators and researchers.