Aon Quantifies Relationship Between Risk Management Maturity and Stock Returns

Companies with higher risk-management maturity experience higher relative stock-price returns, lower volatility in stock price, higher relative return on equity and greater resilience in the immediate aftermath of significant financial-market risk events, an Aon study shows.

While risk managers may see this as stating the obvious, Aon and the Wharton School of the University of Pennsylvania now provide actual data to support these assertions.

The study analyzed a sample of 361 publicly traded companies and used Bloomberg market data from March 2011 to March 2013 to “evidence a statistical link between higher levels of risk maturity and higher relative stock-price returns along with lower levels of relative stock-price volatility.”

Aon categorized the companies into its Risk Maturity Index, where they were rated on a scale of 1-5. A rating of 1 is “initial/lacking,” or, “Component and associated activities are very limited in scope and may be implemented on an ad-hoc basis to address specific risks.” A rating of 5 is “advanced,” or, “Well-developed ability to identify, measure, manage and monitor risk across the organization; process is dynamic and able to adapt to changing risk and varying business cycles; explicit consideration of risk and risk management in management decisions.”

Aon notes that 0.7% of the companies had a rating of 5 and 3.3% had a rating of 1. The global average was 3, with the percentage breakdown representing a bell curve from 1-5.

Looking at yearly stock-price returns, Aon says that, during the period from March 2012 to March 2013, organizations with the highest Risk Maturity Rating of 5 as a group showed stock-price performance of +18%, while organizations with the lowest rating of 1 showed stock-price performance of -10%.

Regarding stock-price volatility during that period, organizations with a rating of 5 experienced volatility that was 38% lower than organizations with a rating of 1.

And with respect to return-on-equity over that period, organizations rated 5 showed ROE performance of +37% while organizations with a rating of 1 showed ROE performance of -11%.

Aon also examined how the organizations' stocks would respond to a list of historical shocks if the same factors occurred today.

For the Lehman default, Aon says organizations rated 5 would today experience an immediate impact on stock-price performance of -21% based on its model, while companies rated 1 would see stock-price performance of -30%.

In the aftermath of the Greek fiscal crisis, if it were to occur today, companies rated 5 would see stock-price performance of -11% while companies rated 1 would see stock-price performance of -20%.

If the March 2011 Japan earthquake happened today, companies rated 5 would see an immediate impact on stock-price performance of -0.3%, while companies rated 1 would show stock-price performance of -3.4%

Aon says, “Aon's partnership with the Wharton School of the University of Pennsylvania has produced pioneering research on this link, confirming a correlation between more mature risk-management practices and stronger financial results.”