Abstract
Purpose – The purpose of this study is to analyze, in the context of the last economic crisis, the prediction capacity of the different risk measures and the relationship between risk and return. Design/methodology/approach – We selected three risk measures constructed using annual accounting data obtained from Spanish companies. A logistic regression was then developed to verify whether the companies’ predictions were eventually correct, considering those companies that were able to survive the crisis. A multiple linear regression was subsequently employed in order to review Bowman’s paradox, that is, in the risk-return relationship. Findings – The research results support the two hypotheses formulated: 1) variability measures of risk have a greater predictive power than that of downside risk measures; 2) the risk-return paradox is more likely to exist in the more uncertain environment of a pre-crisis period of time. Originality/value – Managers could employ the frameworks developed in this study as important diagnostic tools in order to attain advance warning of whether an organization may be close to failure. An analysis of this nature would then allow a firm to take appropriate action to arrest the process.
Highlights
The first indications of the global crisis appeared in August 2007, when there were problems in the interbank lending market and the subprime mortgage market began to implode
We present various risk measures and analyze their prediction capacity by considering the global crisis of 2008
After reviewing the main theories, we adopt an integrative risk perspective and formulate the following hypothesis: H1 – Variability measures of risk have a greater predictive power than that of downside risk measures. We develop another line of research in relation to the well-known riskreturn paradox, i.e., we analyze the relationship between risk and return
Summary
The first indications of the global crisis appeared in August 2007, when there were problems in the interbank lending market and the subprime mortgage market began to implode. It continued with a slowdown in the U.S economy and the sale of Bear Stearns in March 2008, after which several economic disasters occurred, such as the bankruptcy of Lehman Brothers, the sale of Merrill Lynch, and the collapse of AIG, Fannie Mae, and Freddie Mac in September 2008 (Heracleous & Werres, 2016). The “great financial rescue” of banks by governments in 2008 stopped further collapse, but the age of austerity still continues, with significant effects for nations, companies, families, and individuals (Starkey, 2015). After reviewing the main theories, we adopt an integrative risk perspective and formulate the following hypothesis: H1 – Variability measures of risk have a greater predictive power than that of downside risk measures
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