Effective risk management outcomes: exploring effects of innovation and capital structure

Purpose - The purpose of this paper is to argue that strategic responsiveness is of paramount importance for effective risk management outcomes and to introduce an empirical study to demonstrate this. Design/methodology/approach - Real options logic is adopted to explain how effective risk management capabilities improve performance and how innovation and financial slack enhance this effect. The propositions are examined across 896 companies using two-stage least square regressions. Findings - The study reveals that risk management effectiveness combines both the ability to exploit opportunities and avoid adverse economic impacts, and has a significant positive relationship to performance. This effect is moderated favorably by investment in innovation and lower financial leverage. Research limitations/implications - The analysis is based on a sample of large firms, which may affect the generalizability of results. Nonetheless, the study shows that effective risk management capabilities differentiate the firms and determine success and failure. It further underscores the importance of combined innovation policy and capital structure decisions as firms deal effectively with risk and uncertainty. Practical implications - The findings indicate that corporate management must consider commitments for innovation and financial slack to enhance positive risk management effects. This result is in dire contrast to traditional beliefs that tighter resource management and higher financial leverage lead to better economies. Originality/value - This is one of few studies to explicitly consider strategic responsiveness as instrumental for effective risk management outcomes while investigating the economic effects associated with the ability to combine generation of upside gains and downside loss avoidance.