Hypotheses

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planning can enhance the ability to successfully respond and adapt to changing circumstances by enhancing firms’ capabilities to effectively configure and deploy resources (Eisenhardt and Martin, 2000; Nair, Rustambekov, Mcshane, and Fainshmidt, 2013). Thus, integration of these processes can represent a dynamic managerial capability (Adner and Helfat, 2003) and contribute to the ability of firms to build and sustain competitive advantage.

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2007). Because of the increasing globalization of markets, intensified competition, and constraints from fast-developing technologies, firms must continually search for new sources of advantage through firm-specific risk-taking in investments that have both significant upside and downside potential (Chatterjee, Wiseman, Fiegenbaum, and Devers, 2003). Firms should

“manage the riskiness of these investments by engaging in risk management activities that reduce the probability that a company will experience financial distress” (Wang, Barney, and Reuer, 2003). Thus, the firm-specific investment rationale can be seen as a plausible explanation for positive effects that are derived from ERM processes (Andersen, 2008).

In order for ERM to be of value, by continually identifying and assessing how firms can respond to and take on strategic risks, it must become part of the firm’s core competences (Chatterjee et al., 2003). By developing ERM into a core competence, firms can experience an increased capital efficiency in that ERM enhances a firm’s ability to allocate corporate resources on an informed risk-reward trade off basis (Grace et al., 2014; Aabo, Fraser, and Simkins, 2005). That is, firms choose between firm-specific investments by assessing the return on the investments after compensating for the costs associated with the increase in the total risk of the firm (Nocco and Stulz, 2006). Hence, ERM may add value by proactively seeking to improve the risk-return aspect of decision-making. On the contrary, ad hoc risk management may lead to an inefficient resource allocation (Hoyt and Liebenberg, 2011) and result in temporary advantages at best (Chatterjee et al., 2003). Thus, ERM can serve as an important management device that can improve firm performance through firm-specific risk taking, which are in turn essential sources of competitive advantage (Andersen, 2008; Bromiley et al., 2014; Chatterjee et al., 2003; Wang et al., 2003). The discussion above leads to the first hypothesis:

H1: Emphasis on the ERM process increases firm performance.

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Strategic planning and its benefits have been studied extensively in the strategic management literature (for a recent literature review see Wolf and Floyd, 2013) and is considered as one of the most influential tools for strategic management (Meissner, 2014).

Several studies indicate that strategic planning results in superior financial performance (Boyd, 1991; Capon, Fakley, and Hulbert, 1994; Hopkins and Hopkins, 1997; Pearce, Freeman, and Robinson, 1987; Schwenk and Shrader, 1993). Yet, critics of strategic planning argue that plans that are too formalized stifle the organizations ability to react to unexpected environmental developments (Hamel, 1996; Mintzberg, 1994), as strategic plans “are blinders designed to focus direction and block out peripheral vision” (Mintzberg, 1990: 184). Other studies suggest that strategic planning has evolved beyond simply being a forecasting and resource allocation device to become a mechanism that provides both guidance and flexibility (Andersen, 2009;

Canales and Vilá, 2008; Grant, 2003). For example, strategic planning has been found to be of additional value for decisions of a more risky nature (Sinha, 1990). More recent studies provide findings that show that strategic planning does indeed result in a superior performance particularly in dynamic environments (Andersen, 2000; Brews and Hunt, 1999; Miller and Cardinal, 1994; O’Regan et al., 2008). Several studies propose that firms operating in environmentally complex and uncertain environments tend to put more emphasis on rational decision-making processes such as strategic planning (Banbury and Hart, 1994; Bourgeois and Eisenhardt, 1988; Brews and Hunt, 1999; Kukalis, 1991).

In the strategic management literature, planning has been described as a systematic and rational process of establishing ends and means (Andrews, 1971; Chandler, 1962; Gimbert, Bisbe, and Mendoza, 2010). Ends represent missions, goals, and objectives set by the organization, and means are the programs of actions and operational plans that marshal organizational resources (Brews and Hunt, 1999). Accordingly, the strategy literature on rational

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decision-making describes strategic planning as a four-step model: specification of objectives, strategy generation, strategy evaluation, and monitoring of results (Boyd and Reuning-Elliott, 1998).

Scholars who advocate strategic planning have asserted that strategic planning provides benefits and drives performance by coordinating strategic decision-making though aspirations and performance goals, and by providing direction and control by integrating different parts of the organization (Meissner, 2014). Langley (1988: 49) asserts that “strategic planning is really a plea for leadership and direction.” It has been described as a process that codifies actions and processes leaving little to chance and helping firms to avoid being caught off guard in unstable environments (Slevin and Covin, 1997). Further, strategic planning has been described as assistance to managers in the integration and control of various parts of a firm (Grinyer, Al-Bazzaz, and Yasai-Ardekani, 1986; Vancil and Lorange, 1976). Firms put an emphasis on strategic planning as a means to enhance coordination and communication, which can ensure that firm members are working toward the same goals (Andersen and Nielsen, 2009; Andersen, 2004; Grant, 2003), and thus reduce position bias (Ketokivi and Castañer, 2004). Such integrative capabilities and functional coordination should enhance organizational effectiveness and ultimately firm performance.

From the discussion above the following hypothesis has been developed:

H2: Emphasis on strategic planning increases firm performance.

According to COSO, ERM is directly related to “strategy setting” (COSO, 2004). Proponents of ERM have been advocating the importance of integrating ERM and strategic planning (Beasley, Branson, & Pagach, 2015; Fraser & Simkins, 2009; Frigo & Anderson, 2011; Moeller, 2007).

Overlooking linking risk management to strategic planning can create critical “blind spots” in strategy execution (Beasley and Frigo, 2009). In the strategic management literature there is a

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vast consensus that systematic scanning activities (to identify, analyze, and monitor risks and opportunities) are considered to be an imperative antecedent to strategic planning and strategic decision-making (Garg et al., 2003; Hambrick, 1982; Rhyne, 1986). Scanning and environmental analysis are considered to be a necessary precursor to the development of goals and strategic plans (Dess, 1987); and statistically a significant relationship between systematic scanning practices and strategic planning has been displayed (Temtime, 2004).

An ERM process that extensively identifies and analyzes firm-specific risks and proactively prepares risk responses increases the corporate risk awareness of the firm (Liebenberg and Hoyt 2003). Research has shown that such a stronger awareness increases the firm’s emphasis on strategic planning. For example, O’Regan et al. (2008) found that firms’

awareness of environmental threats leads to more emphasis on strategic planning. Their study further showed that strategic planning serves as an important mediating mechanism between risk awareness and financial performance. This mediating relationship can be explained by that firms that are aware of risks that threaten them tend to respond by trying to achieve control of those risk situations. In the threat-rigidity literature, risk has been conceptualized as a loss of control rather than a loss of tangible resources (Chattopadhyay et al., 2001; Ocasio, 1995). Strategic planning may provide senior managers with a feeling of confidence and control (Falshaw, Glaister, and Tatoglu, 2006). In that, a stronger awareness of the environmental jolts that the firm faces leads to efforts to gain a sense of mastery by emphasizing strategic planning since “it sets a general direction for the firm and allows the top management team and the rest of the organization to focus on execution” (Bourgeois and Eisenhardt, 1988: 829).

Consequently by ensuring convergence toward action (Langley, 1990), ERM may provide the decision threshold trigger for change; while strategic planning incorporates these decisions on how to respond to risks and opportunities through the strategic decision-making of the firm. As “strategic planning is the continuous process of making present entrepreneurial

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(risk-taking) decisions systematically and with the greatest knowledge of their futurity” and by

“organizing systematically the efforts needed to carry out these decisions (Drucker, 1974: 125).

In conclusion, ERM can assist the firm in developing an aggregated picture of how it can maneuver most advantageously in the risk landscape; while strategic planning coordinates and communicates these efforts into corporate actions through means and ends. ERM provides an input over causal links between desired outcomes, events that possibly affect these outcomes, and actions that respond to these events. Strategic planning filters and processes these inputs and provides a clear and workable scheme for taking action (Liedtka, 2000). Thus, it is expected that firms that put more emphasis on having ERM processes are more inclined to make use of strategic planning to ensure that these decisions are implemented through goal setting, planning, and evaluation.

Together, the above arguments suggest that strategic planning mediates ERM’s positive effect on firms’ performance, and suggest the following hypothesis:

H3: ERM’s positive effect on firms’ performance is mediated by strategic planning.

The hypothesized relationships are illustrated in the model shown in Figure 1.

--- Insert Figure 1 about here --- 3. METHODS

To test for the hypothesized relationships, the study used both primary and secondary data. The primary data was collected in 2013 using a mailed questionnaire that was sent to the Chief Financial Officer (CFO) or the head of finance in 500 of the largest Danish firms. Secondary data was collected from the Navne and Numre database (http://www.nnerhverv.dk/), including the firms' financials, industry affiliation, number of employees, stock market listing, legal form, and founding year. The 500 firms cover a broad set of industries, including manufacturing,

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construction, retailing, financial services, and other professional services. Before the actual study took place, the survey instrument and measures were pretested on three managers to receive an impression of how the questions would be perceived. Subsequently the survey was tested on 45 managers from firms that were not included in the main sample. Based on the pre-test, some minor clarification improvements were made. In April 2013, the CFO’s of the respective firms were approached with a personalized covering letter and a two page questionnaire. Three weeks later, a second letter was sent to the managers who had not responded in the first round; these letters produced 141 responses. In June 2013, a marketing bureau was engaged to contact the remaining managers by phone resulting in a total of 298 responses (i.e. a response rate of 59.6 %). The obtained data was tested for a potential non-response bias by sector, size, turnover, and a number of other financial aspects to compare the responding companies with the population of the 500 largest companies in Denmark. None of the tests gave any cause for concern. The dependent variable was based on data from a different source than the independent variables which limits the danger of a common method bias. Only firms with a complete data set were included in the subsequent analyses, resulting in 260 observations.

In all of the analyses, the independent variables were lagged by one year (t-1) to ensure that the explanatory variables occurred before the outcome variable. Also in line with the recommendations of Petersen (2009), robust standard errors were applied throughout the data analysis.