Abstract
Accounting based risk and return relationship is a relatively incomplete issue, which has mostly been studied under a separate framework from financial markets based risk and return. Researchers find different results for different classifications of companies/industries/time frames. This paper reports the cross-section and panel correlations between accounting risk and return for various industrial company size categories in Turkey. The goal is to show the direction and magnitude of the relationship. When standard deviation is used as a risk measure, significant correlations are typically positive for small & medium sized companies and large companies. The positive relationship is very strong when the performance measure is ROE. All significant correlations become negative for very large sized companies. For each size category, no difference is observed between low-performers and high-performers in terms of significant coefficient signs. However, when we look at the magnitude of coefficients, there are some substantial differences between size categories, and between performance categories. When the risk measure is total debt to total assets ratio, our results show significant negative association between return and risk for all company size categories.
Highlights
Firm-level accounting based risk and firm-level accounting based return posed a paradox in strategic management, sparked by consecutive studies of Bowman (1980, 1982, 1984)
Our panel consists of 196 industrial non-financial companies operating and registered in Turkey based on accounting data from ORBIS (Note 6) database over 9 years, 2004-2012
Starting with Bowman (1980), a large body of literature analyzing the relationship between accounting risk and return has been developing, and papers being produced both supporting and criticizing his findings and methodology
Summary
Firm-level accounting based risk and firm-level accounting based return posed a paradox in strategic management, sparked by consecutive studies of Bowman (1980, 1982, 1984). His studies remark that these two variables might be negatively related to each other under some circumstances, as opposed to generally accepted rule of financial market based positive relationship found by many researchers (Note 1). Risk-averse investors are those who purchase assets with high risk only if they expect a premium return, as suggested by contingent risk decision hypothesis, reviewed by Ruefli et al (1999); Nickel and Rodriguez (2002) This means a positive relationship between risk and return. Empirical results section shows the findings, and conclusions section sums up the overall paper
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