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Published or forthcoming:

McShane, M., Zhang, T., Cox, L., and Risk Allocation across the Enterprise: Evidence from the Insurance Industry. Journal of Insurance Issues, forthcoming.

Abstract: Financial researchers initially regarded hedging activities as a means to reduce total firm risk, which often is defined in terms of cash flow volatility. More recently, researchers have focused on the strategic allocation of risk. Direct tests of risk allocation have been problematic, however, because hedging data are rarely available and, when available, are only specific to a single operation of the firm, such as bank lending. In this study, we exploit unique data from the insurance industry that allows us to observe hedging proxies for both investment and insurance underwriting risks and test the risk allocation hypothesis developed in the finance literature. We also conduct separate examinations of life-health and property-casualty insurers, which reveal differences in the risks and hedging activities of these two types of insurers.

McShane, M., Nair, A., Rustambekov, E., Does Enterprise Risk Management Increase Firm Value? Journal of Auditing, Accounting, and Finance, forthcoming

Abstract: Enterprise risk management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its
effectiveness. The scant research on the relationship between ERM and firm performance has offered mixed findings, and has been limited by the lack of a suitable proxy for the
degree of ERM implementation. Using Standard and Poor’s newly available risk-management rating, the authors find evidence of a positive relationship between increasing levels of TRM
capability and firm value but no additional increase in value for firms achieving a higher ERM rating. Considering these results, the authors suggest directions for future research.

Pinto, C. Ariel; McShane, Michael K.; and Pathak, Abhishek S. (2011) "Delayed-Bang Approach Towards More Sustainable Critical Infrastructure Risk Management," Journal of Homeland Security and Emergency Management: Vol. 8: Iss. 1, Article 23.
- Abstract: This article describes the Delayed Bang Approach for determining the value of risk management alternatives in critical infrastructure security. The discussion includes (1) the need for sustainable risk management (2) the importance of time valuation in evaluating competing loss prevention and loss reduction alternatives, (3) the convergence of deterministic engineering economics, survivability analysis , and probabilistic analysis, and (4) hypothetical examples of the Delayed-Bang Approach and significance towards more sustainable risk management.

McShane, M., Cox, L., and Butler. R., 2010, Regulatory Competition and Forbearance: Evidence from the Life Insurance Industry, Journal of Banking and Finance, 34: 522-532.
- Abstract: Regulatory separation theory indicates that a system with multiple regulators leads to less forbearance and limits producer gains while a model of banking regulation developed by Dell’Ariccia and Marquez (2006) predicts the opposite. Fragmented regulation of the US life insurance industry provides an especially rich environment for testing the effects of regulatory competition. We find positive relations between regulatory competition and profitability measures for this industry, which is consistent with the Dell’Ariccia and Marquez model. Our results have practical implications for the debate over federal versus state regulation of insurance and financial services in the US.

McShane, M. and Cox, L., 2009, Issuance Decisions and Strategic Focus: The Case of Long-Term Care Insurance, The Journal of Risk and Insurance 76: 87-108.
- Abstract: Increasing costs of long-term care are placing ever greater burdens on state and federal budgets, yet private long-term care insurance remains a relatively
  minor financing vehicle. Although many researchers provide rationales for the limited private market, some life–health insurers have forged ahead into
  this relatively new and risky line of business. We investigate what makes these insurers different and whether managers are following a diversification
  or strategic focus strategy. We find that strategic focus is a consistently important factor and that managers’ participation and volume decisions are made independently.\

Wells, B., Epermanis, K., Cox, L., McShane, M., 2009, Risky Asset Substitution in the Insurance Industry: A Historical Example, Journal of Insurance Regulation. 27: 67-90.
- Abstract: In the 1980s, life insurers sold guaranteed investment contracts (GICs) to pension plan sponsors, then backed these contracts with portfolios heavily weighted with
  higher risk assets such as common stocks and junk bonds. Ultimately this caused considerable loss, and history has repeated itself in many respects in recent years via
  holdings of equities and mortgage-backed securities. We evaluate the risky asset substitution in the life insurance industry from an historical perspective to determine if
  organizational form or other factors might be rationale for managerial decisions to engage in asset substitution. We find evidence that stock insurer managers are more
  likely than their mutual counterparts to engage in this type of risky asset substitution. Our findings provide rich ground for future research as the subprime mortgage and
  credit default swap debacles unfold, as well as public policy implications for insurance regulators concerned with the fiscal health of the insurance industry.

Under review

Cox, L., Ge, Y., McShane, M., Early Mover Advantages in the LTCI Market.
- Abstract: Researchers frequently question whether financial firms benefit by developing new products because barriers to entry common to other industries generally do not exist. Studies of early mover advantages for new financial products provide mixed evidence at best. We find evidence of early mover advantages in the relatively young market for long-term care insurance (LTCI) using data that allows broad testing of financial performance. Product differentiation, individual lines exposure, firm size, and traditional health insurance experience also affect financial performance.

Nair, A., Bromiley, P., McShane, M., Rustambekov, E., Understanding and Managing Risk: Bridging the Silos
- Abstract: The recent financial crisis has put a spotlight on risk management. Business publications have responded to the crisis by advocating the practice and teaching of the new paradigm of enterprise risk management (ERM). However, following this prescription is difficult because of the fragmented nature of risk research, with there being little agreement among scholars and practitioners even on the conceptualization and measurement of risk. Thus, this paper begins with a multi-disciplinary review of risk and risk management research, and then outlines numerous ways that management scholars can contribute to the development of research on ERM. The paper concludes on a cautionary note as it identifies many pitfalls in managing enterprise wide risks. The objective of this paper is to spur research and debate among scholars and practitioners about the challenges of ERM.

Pinto, A., McShane, M., Bozkurt, I., Risk and System of Systems: Toward a Unified Concept.

Abstract: Many systems and projects that concern systems engineers, engineering managers, and and business managers today can be defined as System of Systems (SoS), which are described as ambiguous, uncertain and dynamic, among others. In addition to the traditional view on risk identification, analysis and management, the concept of risk should be considered with respect to these systems of systems. The purpose of this paper is to analyze both fundamental concepts and recent publications in system-of-systems, business and engineering management, as well as risk analysis, modeling, and management for the purpose of better describing the concept of risk with respect to system of systems. The ultimate goal is to provide engineering and business managers the necessary perspective on the concept of risk and its management for the next generation of systems – including various descriptions of risk and discussion of the relevance of properties of system-of-systems to sustainable management of risks in engineered systems. To achieve a truly sustainable management of risk, there has to be a change in paradigm from a traditional description of risk to that of a more holistic perspective.

Nair, A., Rustambekov, E., McShane, M., The Asymmetric Nature of Dynamic Capabilities: Relevance of Insurance Firms’ Risk Management Capability during the Global Financial Crisis

We view risk management as a dynamic capability that should allow firms to respond to radical changes in their environment more effectively. The financial crisis of 2008 /2009 provides the stylized setting to examine this conjecture. We test our hypotheses using a sample of firms in the US insurance industry. We find that the extent of shock that was experienced by firms in our sample was associated with the riskiness of its stock and institutional linkage. However, the extent of their rebound from the crisis was strongly associated with their broader risk management capability. Based on our results we argue that dynamic capabilities may have two dimensions — a reaction function and response function. While some dynamic capabilities may allow faster reaction, others may allow faster response. The results suggest that firm dynamic capabilities may not fully allow them to avoid environmental shocks that are extreme, yet, they do allow them to respond quickly to them. The paper contributes to the literature on dynamic capabilities and risk management. Suggestions for future research are offered.