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Background and Prior Studies

Torben Juul Andersen (Copenhagen Business School, Denmark)

A Study of Risky Business Outcomes: Adapting to Strategic Disruption

ISBN: 978-1-83797-075-9, eISBN: 978-1-83797-074-2

Publication date: 29 September 2023


This chapter introduces empirical studies of firm performance and related risk outcomes conducted in the management and finance fields presenting underlying theoretical rationales as they have evolved over time. Early finance studies of market-based returns predominantly found positively skewed return distributions that conform to assumptions about higher returns associated with more risky investments. Subsequent studies found that performance outcomes measured as accounting-based financial returns generally display left-skewed distributions that reflect negative risk-return relationships. This artifact was first observed by Bowman (1980), thus often referred to as the “Bowman paradox” because it contravened the conventional assumptions in finance. The management studies have largely confirmed the inverse risk-return observations but often following rather confined research streams. A contingency perspective inspired by prospect theory and behavioral rationales have investigated the lagged effects of performance on risk outcomes and vice versa. Another stream has focused on the spurious relationships between negatively skewed performance distributions and the inverse risk-return associations. A third approach considered the performance and risk outcomes as deriving from the firms responding in distinct ways to exogenous changes. These studies reach comparable results but underpinned by very different rationales. The finance studies observe deviations from the pure doctrine of positive risk-return associations embedded in the widely adopted capital asset pricing model (CAPM) and note deficiencies with alternative interpretations that even question the validity of CAPM. A more recent strain of studies in behavioral finance observes how many (even professional) investment managers have biases that lead to inverse relationships between perceived risk and return outcomes. While these diverse fields of study have different starting points, they uncover an increasing number of interesting commonalities that can inspire the ongoing search for explanations to observed left-skewed financial returns and negative risk-return correlations across firms.



Andersen, T.J. (2023), "Background and Prior Studies", A Study of Risky Business Outcomes: Adapting to Strategic Disruption (Emerald Studies in Global Strategic Responsiveness), Emerald Publishing Limited, Leeds, pp. 67-82.



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