Exploring the Value Creation Mechanism of Enterprise Risk Management Disclosure: The Mediating Role of Profitability

1. Introduction

Currently, the business world is facing an unpredictable changing environment (Ukoba et al., 2025). For example, this includes geopolitical tensions, rapidly evolving digital transformation, climate change, and global economic uncertainty. These conditions will trigger various business risks that impact corporate sustainability. According to the Global Risks Report 2025 published by the World Economic Forum, in the coming years, various countries will face a range of risks and uncertainties. Consequently, companies are compelled not only to focus on short-term profit targets but must also be able to create sustainable firm value . Investors view corporate value as an indicator of a company’s current and future performance and as a reflection of the company’s ability to manage and navigate uncertainty. Consequently, companies must be able to enhance their corporate value by fostering sustainable business growth.

The ever-increasing complexity of the business environment has led to a shift in how investors assess a company; whereas previously investor decisions focused more on financial aspects, they have now shifted toward non-financial aspects . Today, investors are increasingly aware that financial statements alone provide limited information about a company’s past performance. On the other hand, a company’s ability to create value in the future depends on its capacity to manage risks, implement effective governance, and enhance transparency toward stakeholders . Consequently, non-financial information is becoming increasingly relevant as it provides a comprehensive view of corporate management, the company’s ability to navigate uncertainty, and its future prospects. Such non-financial information can serve as a communication tool to reduce information asymmetry, thereby enabling investment decisions to be made rationally.

Among various forms of nonfinancial disclosure, ERM disclosure is receiving increasing attention from various stakeholders, such as investors and regulators . ERM disclosure provides information on how a company identifies, evaluates, manages, and monitors various risks that affect the achievement of its strategy. ERM disclosure provides more information on a company’s preparedness to anticipate future uncertainties. Comprehensive ERM disclosure provides investors with a better opportunity to understand a company’s risks and how the company’s strategy addresses them . Thus, ERM disclosure can be interpreted as a form of corporate transparency that enhances the quality of information, leading to a positive market response.

The effect of ERM disclosure on firm value can be analyzed using signaling theory, which states that companies provide information to investors as a signal that the company has good business quality and prospects. ERM disclosure is a signal indicating that the company has adequate mechanisms in place to manage risks that affect its strategic objectives. ERM information can reduce information asymmetry because investors obtain sufficient information about how the company deals with business uncertainty. Companies that consistently disclose information about their risk management will enhance investor confidence in the company’s prospects, which in turn will increase investment interest, improve the market’s perception of good corporate governance, and drive an increase in corporate value . Thus, high-quality ERM disclosure will lead to an increasingly positive market assessment.

Currently, research on ERM disclosure and its impact on firm value continues to grow, yet empirical evidence still yields mixed results. Some studies suggest that ERM disclosure affects firm value by increasing transparency, thereby reducing information asymmetry . Conversely, other studies suggest that ERM disclosure has no significant effect on firm value . The inconsistency in these findings indicates that the relationship between ERM disclosure and firm value is complex and not straightforward. Previous research has largely focused on the question of whether EMR disclosure affects firm value, while more in-depth analysis of how EMR disclosure affects firm value has been relatively limited. This means that studies analyzing in greater depth how firm value is formed through risk management disclosure have received little attention. On the one hand, effective risk management is believed to improve operational efficiency, optimize the use of resources, and reduce potential losses resulting from business risks. Strong operational performance can boost profitability, which in turn is viewed positively by the market. Therefore, it is important to conduct a study examining the impact of EMR disclosure on firm value, incorporating profitability as a mediating variable.

Based on the above discussion, this study will examine the impact of ERM disclosure on firm value, using profitability as an intervening variable, among non-financial firms listed on the Indonesia Stock Exchange. Thus, this study differs from previous research, which has focused more on testing the direct effect of ERM disclosure on firm value. This study seeks to explain how ERM disclosure can be interpreted as a factor driving an increase in firm value through profitability. Consequently, this study will contribute to enriching the theoretical and literature review regarding the mechanisms of value creation through ERM disclosure practices. Additionally, this study will contribute by providing empirical evidence from non-financial companies in Indonesia, which exhibit governance, transparency, and regulatory characteristics that differ from those in developed countries. The results of this study will have practical implications: for corporate management, they will encourage greater transparency in presenting EMR information as a strategy for creating corporate value; for regulators, the findings will serve as important input for encouraging companies to enhance the transparency of their risk disclosure practices, making them more informative.

In the Indonesian context, strategies to enhance corporate value have also become a key focus for non-financial companies in Indonesia operating in a dynamic economic environment and amid increasing demands for transparency. In recent years, investors have not only evaluated companies based on financial performance but have also increasingly considered the quality of corporate governance and a company’s ability to manage various business risks. These conditions have prompted companies to strengthen their Enterprise Risk Management practices and improve the quality of their disclosures in annual reports. Nevertheless, the level of risk management disclosure in Indonesia still varies considerably, raising questions about the extent to which such information can enhance investor confidence and create corporate value.

2. Literature Review And Development Hypothesis

2.1 Signaling Theory

Signaling theory was first introduced by Spence (1970), who argued that information asymmetry often occurs in markets between agents and principals. Management is recognized as having more information about the company’s condition, its prospects, and the risks it will face than investors do. The limited information available to investors makes it difficult for them to assess the company’s quality and future prospects. Therefore, companies will strive to reduce this information imbalance by disclosing information to the public as signals regarding the quality and prospects of the company’s business .

The dynamically changing business environment means that the signals conveyed by companies include not only financial information but also non-financial information. Currently, investors are increasingly considering Environmental, Social, and Governance (ESG) information, corporate governance, and risk management in their investment decision-making processes. Non-financial information is believed to provide a more comprehensive view of a company’s ability to create long-term value .

Signaling theory asserts that companies capable of providing more transparent information will gain greater investor trust because investors use that information to reduce uncertainty and information asymmetry in the market. Conversely, limited information will cause investors to face higher uncertainty, particularly when evaluating a company’s future prospects. Thus, this theory is relevant for explaining the relationship between information disclosure, corporate performance, and firm value. In this study, signaling theory is used to predict the relationship between Enterprise Risk Management Disclosure, profitability, and firm value.

2.2 Enterprise Risk Management Disclosure

ERM is an integrated mechanism used by companies to manage various risks that may affect the achievement of strategic objectives. This differs from traditional risk management, which manages risks in a piecemeal manner based on individual functions. ERM, on the other hand, views risk as an integral part of the company’s overall strategy, managed in a coordinated and holistic manner . According to the COSO framework (2017), ERM not only minimizes losses but also supports value creation, enhances performance, and facilitates effective decision-making. As ERM practices continue to evolve, researchers’ attention today is shifting from merely focusing on the implementation of risk management to examining the extent to which companies communicate these practices to investors through ERM disclosures .

ERMD is a disclosure intended to convey information related to the processes of risk identification, assessment, control, and monitoring as a form of corporate transparency and accountability. ERM disclosures are generally presented in annual reports, corporate governance reports, or sustainability reports. ERM disclosures hold high informational value for investors because they contain forward-looking information . Therefore, the scope of risk management disclosures is believed to help investors evaluate a company’s future prospects

Previous studies have found that investors increasingly require information on risk management, particularly for companies facing high levels of business environment uncertainty, such as regulatory changes, cyber risks, and sustainability issues

2.3 Firm Value

Firm value reflects the market’s perception of a company’s performance in terms of economic value creation and its ability to generate future cash flows. Thus, a company’s value is determined not only by its current financial performance but also by investors’ expectations regarding the company’s growth, corporate governance, and—equally important—its ability to manage various risks . The complexity of the business environment faced by companies has led to a shift in the factors influencing firm value.

Currently, investors do not focus solely on financial information; they are increasingly considering non-financial information when evaluating a company’s prospects, including the implementation of corporate governance and information regarding risk management . According to signaling theory, adequate disclosure can minimize information asymmetry, thereby increasing investor confidence, which in turn fosters a positive market perception . Consequently, firm value can serve as a benchmark for evaluating whether the risk management information disclosed by a firm creates value for investors.

2.4 Profitability

Profitability is a company’s ability to generate profits by efficiently utilizing all of its resources. Profitability is also an important benchmark for assessing how effectively management manages the company’s assets. Consequently, companies with high profitability are considered to have better prospects and thus receive a positive response from the market In this study, profitability is not only recognized as a financial performance indicator but is also viewed as a value creation mechanism. This means that effectively implemented risk management will help the company control risks, thereby improving operational efficiency and supporting the quality of decision-making. Such performance improvements have the potential to increase profitability, which is then positively received by investors through an increase in corporate value .

Therefore, in this study, profitability is positioned as a mediating variable to explain how the quality of ERM disclosure can drive an increase in firm value. This research model is expected to provide a broader perspective compared to previous studies that only examined the direct effect of ERM disclosure on firm value.

2.5 Hypothesis Development

Enterprise Risk Management Disclosure and Firm Value

According to signaling theory, ERM disclosure serves as a signal to investors regarding the quality of corporate governance and provides information on how a company manages business risks. Adequate disclosure is expected to minimize information asymmetry, thereby increasing investor confidence in the company’s future prospects. The increasing complexity of the business environment has made investors’ need for corporate information increasingly critical. Information related to risk management is particularly important, as it helps investors evaluate the sustainability of the company’s future performance .

Several studies have shown that ERM disclosure has a positive effect on firm value because such disclosure is viewed as a form of transparency. Adequate disclosure enhances management’s credibility, thereby improving the market’s perception of the company’s governance . However, some previous studies have also reported insignificant results, indicating that the effect of ERM disclosure on firm value depends on firm characteristics and the firm’s business environment. Based on this reasoning, the following hypothesis is formulated.

H1: Enterprise Risk Management Disclosure has a positive effect on firm value.

Enterprise Risk Management Disclosure and Profitability

ERM disclosure serves not only as a means of communication with investors but also as a reflection of the effectiveness of risk management implementation. Good risk management enables companies to identify risks earlier, utilize resources more optimally, and improve operational efficiency. Furthermore, ERM disclosure reflects a company’s ability to manage business risks systematically, thereby allowing the company to reduce the likelihood of losses, optimize operational efficiency, and support higher-quality decision-making processes. This improved business management, in turn, will enhance the company’s ability to generate profits .

Signaling theory explains that companies with sound risk management practices convey information through their risk management disclosures as a signal of governance quality. Thus, the higher the quality of ERM disclosure, the greater the company’s opportunity to reap economic benefits, as reflected in increased profitability. Based on this argument, the second hypothesis is formulated as follows.

H2: Enterprise Risk Management Disclosure has a positive effect on profitability.

Profitability and Firm Value

Profitability is one indicator used to assess a company’s financial performance. Companies that are able to consistently generate profits or show a trend of increasing profits are perceived as having better growth, leading the market to view them positively. Signaling theory explains that high profits serve as a positive signal indicating that a company has managed its operations effectively and is capable of creating economic value. Previous studies have shown that profitability affects firm value because investors have high expectations regarding future growth and cash flow . Therefore, the third hypothesis is formulated as follows.

H3: Profitability has a positive effect on firm value.

The Mediating Role of Profitability

Several theoretical studies suggest that ERM disclosure is believed to increase firm value because it is considered to enhance transparency; however, this effect is not entirely direct. The quality of risk management disclosure serves as an indicator of a firm’s operational efficiency, enabling it to minimize potential losses and improve performance. This improved performance, in turn, can boost profitability, which investors then respond to positively by increasing the company’s value .

Thus, profitability is predicted to serve as the mechanism explaining how ERM disclosure contributes to enhancing corporate value. This means that high-quality risk management disclosure can reduce information asymmetry and serve as an indicator of the effectiveness of risk management, thereby improving financial performance, which ultimately creates corporate value. Therefore, the fourth hypothesis is formulated as follows.

H4: Profitability mediates the effect of Enterprise Risk Management Disclosure on corporate value

3. Research Methodology

This study employs a quantitative approach with an explanatory research design, specifically to examine the relationship between ERM disclosure, profitability, and firm value. This approach was chosen because it aligns with the research objective of testing hypotheses based on a theoretical framework by examining both direct and indirect effects . The study uses secondary data in the form of annual reports and financial statements of companies listed on the Indonesia Stock Exchange (IDX).

3.1 Population and Sample

The study population comprises all non-financial companies listed on the Indonesia Stock Exchange during the period from 2023 to 2025. Financial companies were excluded from this study because companies in this sector have different characteristics from non-financial companies. The sampling technique used was purposive sampling, which involves selecting a sample based on criteria aligned with the research objectives. The sample selection criteria are as follows:

1. Non-financial companies listed from 2023 to 2025

2. Companies that published complete financial statements or annual reports during the observation period

3. Companies with complete data as required to measure the variables

The measurements for each variable are described in table 1.

ERM Disclosure is measured using content analysis of a company’s annual reports or financial statements. A score of 1 is assigned if an item is disclosed, and a score of 0 if it is not disclosed. Subsequently, the disclosure scores are summed and divided by the total disclosures according to the COSO framework . Profitability is measured using return on assets (ROA), and firm value is measured using the Tobin’s Q ratio.

3.2 Data Analysis Techniques

Data analysis was conducted using Smart PLS software. Before testing the hypotheses, the researcher performed descriptive statistical analysis to provide information on the characteristics of the research variables, including minimum, maximum, mean, and standard deviation. Hypothesis testing was performed using multiple linear regression analysis. The direct effects of ERM disclosure, profitability, and firm value were tested using a regression model. Meanwhile, to test the mediating effect of the profitability variable, indirect effect bootstrapping was used .

The empirical model used in this study is formulated as follows:

Model 1 RO A i = α + β 1 ERM D i ++ ε i

Model 2 F V i = α + β 1 ERM D i + β 2 RO A i + ε i

Notes:

FV = Firm Value

ERMD = Enterprise Risk Management Disclosure

ROA = Profitability

ε = Error term

To test for direct and indirect effects by examining the p-value. If the p-value is less than .05, it is concluded that there is a significant effect.

4. Results and Discussion

Descriptive statistics were used to provide an overview of the data for the research variables. Table 2 shows that the ERM disclosure variable has a mean of 0.644, with a standard deviation of 0.230, a minimum value of 0.411, and a maximum value of 0.840. Meanwhile, profitability, as measured by Return on Assets, has a mean of 0.072, a minimum value of −0.015, and a maximum value of 0.191, with a standard deviation of 0.067. Furthermore, firm value, as measured by Tobin’s Q, had a mean of 0.733, a minimum value of 0.592, a maximum value of 2.882, and a standard deviation of 0.622.

Prior to the hypothesis testing stage, the researcher first conducted diagnostic tests on the parameter estimates. These tests included checks for normality, multicollinearity, and heteroscedasticity, with the aim of ensuring that the regression model met the necessary assumptions. The test results indicated that all assumptions were met, meaning the regression model was suitable for testing the relationships among the variables.

Table 3 of the statistical test results shows that ERM disclosure has a positive and significant effect on firm value, with a coefficient of 0.320, a t-value of 3.881, and a p-value < 0.001. These statistical results indicate that companies that disclose their risk management practices will receive a positive response from the market, as reflected in their firm value. In other words, risk disclosure sends a positive signal to investors, indicating that the company has a sound risk management system. Consequently, market confidence increases, ultimately leading to an increase in firm value. The test results also show that ERM disclosure has a positive and significant effect on profitability, with a coefficient of 0.236, a t-value of 2.456, and a p-value of 0.015.

These results underscore that companies that have and fully disclose their risk management practices tend to be better able to manage various business uncertainties. Effective risk management enables companies to minimize the likelihood of potential losses, improve operational efficiency, and ultimately achieve better financial performance.

The results of the study indicate that profitability has a positive and significant effect on firm value, with a coefficient of 0.323, a t-value of 4.132, and a p-value < 0.001. These results indicate that an increase in a firm’s ability to generate profits will be followed by an increase in firm value. This finding reflects that investors are more interested in companies with strong financial performance because they perceive such companies to have more profitable prospects. Furthermore, Table 4 shows that after the profitability variable is included as a mediator, ERM Disclosure continues to have a positive and significant effect on Firm Value (β = 0.248; p = 0.004), compared to the effect before the mediator was included (β = 0.320). These results indicate that the coefficient value decreases after the mediator variable is included; this decrease reflects that the effect of ERM disclosure on firm value is not only a direct effect but also occurs through increased profitability. In other words, companies that implement and disclose risk management are likely to improve their profitability, and this, in turn, contributes to an increase in firm value.

Finally, regarding the testing of the mediating effect, the results of the statistical test indicate that ERM disclosure has a positive and significant indirect effect on firm value through profitability. This is demonstrated by an indirect effect coefficient of 0.080 with a p-value of 0.018. This means that profitability mediates the relationship between ERM disclosure and firm value. Thus, the implementation and disclosure of risk management not only have a direct impact on investor confidence but can also improve a company’s financial performance, which in turn increases corporate value. Profitability plays a role as a partial mediator because both the direct and indirect channels of influence are significant.

5. Discussion

Risk management disclosure is important information for investors in evaluating a company’s quality. Information regarding how a company manages business risks is crucial for investors to gain confidence that the company can manage various uncertainties in the future. It is this confidence that drives an increase in the company’s market value. According to signaling theory, ERM disclosure serves as a positive signal that a company conveys to investors. Information regarding risk management is a way for companies to demonstrate that they are not only focused on short-term goals but are also committed to ensuring sustainability through risk management. The more comprehensive the information disclosed, the lower the information asymmetry, enabling investors to make investment decisions with a higher degree of confidence . Thus, the results of this study reinforce those of previous studies, which found that ERM disclosure adds value for companies by improving market perceptions of their future prospects .

Companies that are able to implement and disclose risk management more effectively tend to manage their business activities more effectively. Risks managed in an integrated manner can reduce potential losses and business uncertainty, and improve the efficiency of resource utilization, which in turn can enhance financial performance. The results of this study can be explained by signaling theory, which states that companies that disclose their risk management practices signal their commitment to information transparency. Adequate disclosure helps investors assess risk management practices, thereby reducing the uncertainty faced by investors. This signal can boost investor confidence and reflect the quality of the company’s management, thereby contributing to increased profits . The findings of this study are consistent with several previous studies showing that ERM disclosure can enhance market confidence in a company .

A company with strong financial performance serves as an indicator to investors that it has a promising future. Profitability is one of the key financial indicators for assessing a company’s ability to generate cash flow, drive business growth, and provide returns to investors. Consequently, an increase in profitability will elicit a positive market response in the form of rising stock prices and company value. These findings support Signaling Theory, which explains that information regarding profits is one of the signals most closely watched by investors. High profitability indicates that a company is capable of managing its resources efficiently and has favorable business prospects for the future. These positive signals boost investor optimism, thereby driving increased demand for the company’s stock and ultimately increasing its value . The results of this study are also consistent with several previous studies showing that profitability reflects a company’s ability to create sustainable economic value for shareholders .

Companies with high ERM disclosure reflect their ability to effectively manage business risks, which in turn leads to increased profitability. Financial performance, in the form of the ability to generate profits, is one of the factors that increases a company’s value. From the perspective of Signaling Theory, ERM disclosure serves as a signal regarding the quality of corporate governance. However, this signal becomes stronger when accompanied by increased profitability. Investors not only pay attention to information regarding risk management systems but also observe whether those systems are truly capable of generating better financial performance. Therefore, profitability serves as a mechanism that strengthens the relationship between Enterprise Risk Management Disclosure and firm value .

The findings of this study indicate that ERM disclosure not only serves as a means of conveying information to investors but also plays a role in creating corporate value. The disclosure of information regarding risk management provides a clearer picture of a company’s ability to cope with business uncertainty. When such information is accompanied by strong financial performance, investors respond more positively, thereby increasing the company’s value.

6. Conclusion And Policy Recommendations

First, ERM disclosure has a positive and significant effect on firm value. These results indicate that the better a company’s disclosure of risk management information, the higher investors’ valuation of the company. Second, ERM disclosure has a positive and significant effect on profitability, meaning that companies with a high level of risk management disclosure tend to have better financial performance. Although this study does not directly measure the quality of Enterprise Risk Management implementation, the results indicate a positive relationship between the transparency of risk management disclosures and a company’s ability to generate profits. Third, profitability has a positive and significant effect on firm value. A company’s ability to generate profits remains one of the key factors investors consider when assessing a company’s prospects. High profitability sends a positive signal about the company’s condition, thereby increasing its value. Fourth, profitability was found to partially mediate the relationship between ERM disclosure and firm value. Risk management disclosure is not only directly related to an increase in firm value but is also linked to increased profitability, which in turn contributes to an increase in firm value.

This study supports Signaling Theory, which indicates that ERM disclosure provides important information for investors in evaluating a company’s performance and prospects. This study demonstrates that disclosures regarding risk management are correlated with an increase in firm value, both directly and through improved profitability. Thus, the results of this study enrich the literature on transparency in minimizing information asymmetry to enhance investor confidence. The results of this study provide important insights for management: the quality of ERM disclosure helps investors obtain comprehensive information, thereby increasing their confidence in the company’s prospects. For investors, the study’s findings illustrate that risk management disclosures are crucial for assessing a company’s readiness to address various business risks. For regulators, these findings serve as a basis for determining the direction of regulatory policies regarding ERM disclosures in an effort to improve the quality of reporting.

However, this study has several limitations. First, the study only included companies listed on the Indonesia Stock Exchange; therefore, the findings cannot be generalized to other types of companies or companies in other countries with different business and regulatory environments. Second, ERM disclosure was measured based on the level of disclosure presented in the companies’ annual reports. Therefore, this study is not yet able to fully describe the actual quality of risk management implementation within companies. Given these limitations, future research is recommended to expand the sample scope by including companies from various countries to obtain a more comprehensive picture of the impact of ERM disclosure on firm value. Additionally, future research may consider using other measures capable of representing the quality of Enterprise Risk Management implementation.