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This chapter outlines the major analytical efforts performed as part of the overarching research project with the aim to investigate the organizational and environmental circumstances around the extreme negatively skewed performance outcomes regularly observed across firms. It presents the collection and treatment of comprehensive European and North American datasets where subsequent analyses reproduce the contours of performance distributions observed in prior empirical studies. Key theoretical perspectives engaged in prior studies of performance data and the implied risk-return relationships are presented and these point to emerging commonalities between empirical findings in the management and finance fields. The results from extended analyses of more fine-grained data from North American manufacturing firms uncover the subtle effects of leadership and structural features, and computational simulations demonstrate how the implied adaptive processes can lead to the empirically observed performance distributions. Finally, the findings from the analytical project activities are set in context and the implications of the observed results are discussed to reach at a final conclusion.

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.

This chapter explores other theoretical explanations to the commonly observed phenomenon of negatively skewed performance outcomes and inverse risk-return relationships in empirical firm data. The analysis conducted in many prior studies have implicated direct causal dependencies between performance and risk, or vice versa, with the possibility of simultaneous two-way relationships that are harder to discern. It is also shown how spurious artifacts deriving from the arithmetic links between mean and variance associate left-skewed distributions with negative mean variance correlations. However, the heterogeneous display of response capabilities among firms that compete in the same industry contexts may provide an alternative explanation for the observed performance characteristics. This is expressed as strategic responsiveness where performance outcomes with high negative skewness and excess kurtosis derive from heterogeneous adaptive processes among firms as they respond to a dynamic environment with different degrees of success. We test these results in different simulated competitive contexts disrupted by major unexpected events and find robust results across different environmental scenarios. The analysis looks at two different response processes, one modeled as conventional adaptive planning following an annual budget cycle, and another modeled as interactive updating where executives have frequent informative budget discussions with operating managers in the firm. The computational simulations show that interactive updating generates outcomes with higher returns and lower performance risk for moderate learning levels and restructuring costs. However, the resulting performance distributions are not as left-skewed as those observed in the empirical data that show higher resemblance to the adaptive planning outcomes.

The global environments that surround contemporary business activities are uncertain, fast-changing, and frequently exposed to abrupt unexpected events with the potential to inflict extreme impacts where the ability to respond and adapt the organization effectively becomes a primary strategic concern. However, various firms that operate across diverse industry contexts approach this adaptive challenge in distinct ways that lead to quite diverse outcomes with many negative performers and some high performers with positive risk features. The heterogeneous approaches appear to consistently form extreme left-tailed performance distributions with inverse risk-return features but we are not really able to explain why and how these regularly observed phenomena come about. Hence, we want to study these organizational artifacts by collecting an extensive updated dataset to test the proposed relationships, explore alternative explanations, and learn from the extreme exemplars often referred to as outliers. There are extensive literatures in (strategic) management and finance that have dealt with the distribution of firm returns from slightly different angles but with some emerging commonalities that can inspire further analyses of the performance data. As a precursor for this, we discuss the odds of effective strategic adaptation in complex dynamic environments and introduce resilience as a proper outcome when simple solutions are scarce, and consider conditions that may facilitate these aims. The premises for the ensuing analyses are laid out and the main contents of the following chapters are presented.

We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assumes CPT parameter values from prior studies. Our data are from laboratory experiments with undergraduate students and MBA students facing substantial real incentives and losses. We also estimate structural models from Expected Utility Theory (EUT), Dual Theory (DT), Rank-Dependent Utility (RDU), and Disappointment Aversion (DA) for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here.

Introduction: Why companies pay dividends and the determinants of dividend policy are considered an unresolved dividend puzzle. To reach a consensus over the puzzle, researchers must investigate the factors affecting dividend policy by incorporating all the determinants into a single research effort.

Purpose: We examine the dividend policy determinants of Sri Lankan firms, explicitly focusing on the banking, finance, and insurance (BFI) sectors.

Methodology: This study uses the quantitative approach applying the Generalized Method of Moments (GMM) system to examine the dividend policy determinants by obtaining secondary data from 51 listed BFI organisations in Sri Lanka.

Findings: The analysis disclosed that the variables of changes in revenues, firm size, liquidity, corporate tax, business risk, and profitability have a positive relationship with dividend yield, whereas investment opportunities, leverage, change in revenues, corporate tax, and firm size impact positively on the propensity to pay dividends in BFI organisations in Sri Lanka. Our findings opine that managers in the BFI industries should prioritise changing their dividend policies by paying close attention to factors, such as dividend yield, changes in revenue, firm size, liquidity, corporate tax ratio, business risk, and profitability because the dividend policy is critical to retaining current investors and luring new ones.

This chapter focuses on testing optimal capital structure theory: The role of intervening variable debt to equity ratio (DER) on the influence of the financial performance, Ownership Structure of Independent Board of Commissioners (IBCO), Audit Committee (ACO), and Institutional Ownership on Firm Value. The research design was explanatory research using path analysis. Using purposive sampling, 61 manufacturing companies, observation period from 2014 to 2018 with 286 N samples. The research novelty empirically can prove the role of intervening variable DER on the effect of return on assets (ROA) on firm value and shows the market response to the ROA is fully reflected by DER, indicating the existence of an optimal capital structure. The role of DER on the effect of ROE and IBCO on firm value is a partial mediation with the inverse direction. This phenomenon shows that the mechanism of forming a balance between the responses of investors and creditors relates to debt financing.

Introduction: The government has taken many initiatives for the overall growth of India after liberalisation and remarkably performed to make India an emerging economy. Due to changes in macroeconomic conditions, investment in companys’ shares includes the possibility of bearing high risk, which cannot be eliminated but, to some extent, minimised. The persistence of risks motivates investors to invest in different available options of investment. Gearing measures, a company’s financial leverage, represent the risk afforded within the company’s capital structure.

Purpose: The research aims to identify the risk-return analysis of financial geared stocks of Nifty 50 companies in India, which have debt equity ratios of more than 1.

Methodology: Convenience and cluster sampling techniques were used to identify companies with debt equity ratios of more than 1. The considered time period is 2010–2019.

Findings: This research found capital structure ratios, debt equity ratio, and total debt ratio. The total equity ratio does not have any visible effect on any of the dependent variables, i.e., Return on equity (ROE), Return on Assets (ROA), Earnings per share (EPS), Return on capital employed (ROCE). It explains the impact of high-levered firms’ performance on profitability and functioning. The study highlights that highly geared companies do not significantly impact the ROA, proving Modigliani and Miller’s (1958) irrelevant theory.

Today, many countries strive to develop their small and medium scale enterprises (SMEs) sectors because of their acknowledged capacity to facilitate the optimal utilization of locally available resources while engaging local technology for the production of goods and services for local consumption as well as export trade. Also in area of agriculture, these enterprises serve as means of sustainable food production, improve employment generation, combat food shortage, and enhance economic growth and development. However, the growth performance of this sector in Nigeria has been dwindling over time, which requires government expenditure (GE) policy intervention. Therefore, this study examines the influence of public expenditure on the growth of SMEs in Nigeria employing unit root and co-integration tests for the period 1981–2019. The results reveal that SMEs and selected macroeconomic variables have a long-run relationship with SMEs output performance. It also shows that GE has direct and significant impact on the growth of SMEs in Nigeria, while government deficit financing (GDF) has adverse and insignificant effects on the Nigeria SMEs both in the short- and long-run period. Inflation rate (INF) has an inverse but significant effect on the growth of SMEs in Nigeria both in the short- and long-run periods. This study thus recommends, among others, that government should ensure the proper management of capital expenditure and recurrent expenditure in raising the growth of SMEs in Nigeria to achieve inclusive growth.