The Correlation between Risk Management and Organizational Performance: An Empirical Investigation using Panel Data

Abstract

The study analyzes risk management and organizational performance in deposit money banks in Nigeria. Two measures of organizational performance concentration are used. The first is the return on assets, while the second is return on equity. Determination of the relationship between risk management and organizational performance is done using panel data regression models. Explanatory variables, such as standard deviation of return on assets, standard deviation of return on revenue, current ratio, quick ratio, equity over total assets, equity over loan ratio, debt over equity and debt over total assets are used. Five hypotheses are tested and overall, organizational performance is positively affected by the risk management mechanisms of the bank and its liquidity policies. However, the relationship between financial leverage, size and age of the bank and financial performance is negative. The study concludes that risk and liquidity management policies are important to high financial performance. However, banks should put in place sound risk management mechanisms and policies to guide their operations. Also, banks should adhere strictly to sound liquidity management practices to guide against lack of liquidity. They should utilize earnings rather than seeking for external financing. Finally, banks should reduce their level of noncurrent assets and invest more in current assets in order to earn more profits from operations.

Keywords: Risk management, organizational performance, deposit money banks, liquidity, financial leverage, size, age, Nigeria