The Relationship Between Risk Management And Firm Efficiency in the Georgian Manufacturing Industry: A Data Envelopment Analysis Approach

Abstract

This study explores the relationship between corporate risk management (RM) practices and firm efficiency in the Georgian manufacturing sector—an area where empirical evidence remains scarce. While the theoretical value of RM is widely recognised, its measurable impact on firms' resource use in producing economic outputs has received limited attention, particularly in emerging economies.

The research applies a two-stage analytical approach. In the first stage, the researchers assessed the relative efficiency of 105 Georgian manufacturing firms in 2021 using Data Envelopment Analysis (DEA) under both Constant Returns to Scale (CCR) and Variable Returns to Scale (BCC) models, in both input- and output-oriented forms. The researchers tested seven model specifications that incorporated financial indicators, including assets, expenses, equity, debt, and income. A specialised two-stage DEA further separated operational efficiency (transforming resources into sales) from financial efficiency (turning sales into profit).

In the second stage, efficiency scores were regressed on comprehensive RM disclosure scores (ranging from 0 to 10) derived from the ISO 31000 and COSO ERM frameworks. The analysis found no statistically significant relationship between RM scores and DEA-based efficiency measures across any of the tested models.

The DEA results revealed significant heterogeneity in performance, with a wide dispersion of efficiency scores across the sample. The two-stage DEA indicated that, on average, firms were less efficient at converting sales into net income than at generating sales from initial inputs. Overall, the findings suggest that, within Georgia's manufacturing industry, formal risk management systems—at least as reflected in disclosure quality—do not have a clear or direct link to short-term operational or financial efficiency.