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On the Relationship between Accounting Risk and Return: Is There a ( B owman) P aradox?
Author(s) -
Brick Ivan E.,
Palmon Oded,
Venezia Itzhak
Publication year - 2015
Publication title -
european management review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.784
H-Index - 32
eISSN - 1740-4762
pISSN - 1740-4754
DOI - 10.1111/emre.12045
Subject(s) - standard deviation , robustness (evolution) , econometrics , phenomenon , economics , leverage (statistics) , accounting , statistics , mathematics , physics , biochemistry , chemistry , gene , quantum mechanics
Bowman's (1980, 1982, 1984) finding of a negative relationship between the means and variances of accounting returns (the B owman P aradox) spurred a considerable literature analyzing this phenomenon. The sign of the relationship between the mean return on equity ( ROE ) and its standard deviation remains unresolved. Concerns were raised about ROE measurement and statistical techniques used in establishing the paradox. The papers critiquing (and supporting) it were mostly limited in scope, studied only short periods of time and provided limited robustness checks. In addition, no paper considered the effect of issuances and repurchase of stocks on the measurement of ROE . This study revisits the Paradox and addresses the above mentioned deficiencies in prior research. We use data from longer periods, control for size and leverage and provide additional robustness checks. We conclude that a positive relationship between mean ROE and its standard deviation is far more likely than a negative one.