Business Risk and Return: A Test of Simultaneous Relationships

Benjamin M. Oviatt and Alan D. Bauerschmidt
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Benjamin M. Oviatt: Department of Management, College of Business Administration, Georgia State University, P.O. Box 4014, Atlanta, Georgia 30302-4014
Alan D. Bauerschmidt: Department of Management, College of Business Administration, University of South Carolina, Columbia, South Carolina 29208

Management Science, 1991, vol. 37, issue 11, 1405-1423

Abstract: Bowman (1980) found an unexpected and paradoxical negative relationship between risk and return in many firms, and, for about a decade, various researchers have attempted to explain the paradox. This article summarizes some of those explanations, and shows that industry conditions and business strategies are likely to influence both risk and return. The relationships are depicted in a simultaneous model where business return, risk, and debt are endogenously determined. The model is tested with 132 nondiversified firms in 8 disparate industries. OLS estimates of the parameters of the model show the risk-return relationship to be significantly negative, as many past researchers have found. However, 3SLS estimates of the parameters of the simultaneous model reveal no significant relationship between risk and return. The tentative conclusion is that many of the studies in the line of research concerned with Bowman's (1980) paradox may have used an improperly specified model, and that when a more realistic simultaneous model is used, return and risk are shown to be influenced by various industry conditions and business strategies, but not by each other.

Keywords: business strategy; industry structure; risk; simultaneous equations (search for similar items in EconPapers)
Date: 1991
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