Skip to main content
SpringerLink
Log in
Book cover

Contemporary Challenges in Risk Management pp 63–90Cite as

Palgrave Macmillan

The Risk-Return Outcomes of Strategic Responsiveness

  • Chapter

  • 398 Accesses

Abstract

The ability to realize sustainable performance over longer periods of time is an essential outcome parameter in strategic management, and another important performance characteristic, not often taken into consideration, is the riskiness of the income stream. The research on the relationships between performance and risk outcomes typically measures performance as the mean value and realized risk as the standard deviation of return measures, such as the accounting-based ratio return on assets (ROA). Based on such mean-variance measures of performance outcomes, Bowman (1980) found a predominantly negative relationship between risk and return across most industries. Since, this finding was at odds with the common assumptions about higher returns associated with more risky business activities; it was referred to as a “risk-return paradox” or simply the “Bowman paradox”. The existence of this risk-return paradox has received much scrutiny in management literature over the years, and the possible explanations that have been presented can largely be categorized around those that are based on prospect theory, on statistical artifacts, and on good management conduct (e.g. Andersen et al., 2007).

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Adner R, Helfat C. (2003). Corporate effects and dynamic managerial capabilities. Strategic Management Journal 24: 1011–1025.

    Article  Google Scholar 

  • Andersen TJ, Bettis RA. (2013). Exploring longitudinal risk-return relationships. Strategic Management Journal, forthcoming.

    Google Scholar 

  • Andersen TJ, Denrell J, Bettis RA. (2007). Strategic responsiveness and Bowman’s Risk-Return Paradox. Strategic Management Journal 28: 407–429.

    Article  Google Scholar 

  • Andrews K. (1971). The Concept of Strategy. Irwin: Homewood, IL.

    Google Scholar 

  • Barney JB. (1986). Strategic factor markets: Expectations, luck, and business strategy. Management Science 32: 1231–1241.

    Article  Google Scholar 

  • Barney JB. (2001). Is the resource-based view a useful perspective for strategic management research? Yes. Academy of Management Review 26: 41–56.

    Google Scholar 

  • Bartram SM. (2000). Corporate risk management as a lever for shareholder value creation. Financial Markets, Institutions and Instruments 9: 279–324.

    Article  Google Scholar 

  • Bazerman MH. (1984). The relevance of Kahneman and Tversky’s concept of framing to organizational behavior. Journal of Management 10: 333–343.

    Google Scholar 

  • Bettis RA, Mahajan V. (1985). Risk/return performance of diversified firms. Management Science 31: 785–799.

    Article  Google Scholar 

  • Bettis RA, Hitt M. (1995). The new competitive landscape. Strategic Management Journal 16(1): 7–19.

    Article  Google Scholar 

  • Bower JL. (1982). Managing the Resource Allocation Process. Harvard Business School Press: Boston, MA.

    Google Scholar 

  • Bower JL, Gilbert CG (eds). (2005). From Resource Allocation to Strategy. Oxford University Press: Oxford, UK.

    Google Scholar 

  • Bowman EH. (1980). A risk-return paradox for strategic management. Sloan Management Review Spring: 17–31.

    Google Scholar 

  • Bowman EH. (1982). Risk seeking by troubled firms. Sloan Management Review Summer: 33–43.

    Google Scholar 

  • Bromiley P. (1991). Testing a casual model of corporate risk taking and performance. Academy of Management Journal 34: 37–59.

    Article  Google Scholar 

  • Brown SJ, Goetzmann W, Ibbotson RG, Ross SA. (1992). Survivorship bias in performance studies. Review of Financial Studies 5(4): 553–580.

    Article  Google Scholar 

  • Cool K, Dierickx I, Jemison D. (1989). Business strategy, market structure and risk-return relationships: A structural approach. Strategic Management Journal 10: 507–522.

    Article  Google Scholar 

  • Cyert RM, March JG. (1963). A Behavioral Theory of the Firm. Prentice Hall: Englewood Cliffs, NJ.

    Google Scholar 

  • Denrell J. (2004). Random walks and sustained competitive advantage. Management Science 50(7): 922–934.

    Article  Google Scholar 

  • Elton EJ, Gruber MJ, Blake CR. (1996). Survivor bias and mutual fund performance. Review of Financial Studies 9(4): 1097–1120.

    Article  Google Scholar 

  • Fiegenbaum A, Thomas H. (1986). Dynamic and risk measurement perspectives on Bowman’s risk-return paradox for strategic management: An empirical study. Strategic Management Journal 7: 395–407.

    Article  Google Scholar 

  • Fiegenbaum A, Thomas H. (1988). Attitudes toward risk and the risk-return paradox: Prospect theory explanations. Academy of Management Journal 31: 85–106.

    Article  Google Scholar 

  • Fiegenbaum A, Hart S, Schendel D. (1996). Strategic reference point theory. Strategic Management Journal 17(2): 219–235.

    Article  Google Scholar 

  • Fishhoff B, Watson SR, Hope C. (1984). Defining risk. Policy Sciences 17: 123–139.

    Article  Google Scholar 

  • Gooding RZ, Goel S, Wiseman RM. (1996). Fixed versus variable reference points in the risk-return relationship. Journal of Economic Behavior and Organization 29: 331–350.

    Article  Google Scholar 

  • Hartman S, Nelson BH. (1996). Group decision making in the negative domain. Group and Decision Management 21: 146–162.

    Google Scholar 

  • Heath C, Tversky A. (1991). Preference and belief: Ambiguity and competence in choice under uncertainty. Journal of Risk and Uncertainty 4: 5–28.

    Article  Google Scholar 

  • Helfat CE, Finkelstein S, Mitchell W, Peteraf MA, Singh H, Teece DJ, Winter SG. (2007). Dynamic Capabilities: Understanding Strategic Change in Organizations. Blackwell Publishing: Malden, MA.

    Google Scholar 

  • Henderson AD, Benner MJ. (2000). The evolution of risk and return in highvelocity settings. Academy of Management Best Paper Proceedings. Toronto, Canada.

    Google Scholar 

  • Henkel J. (2000). The risk-return falacy. Schmalenbach Business Review 52: 363–373.

    Google Scholar 

  • Henkel J. (2009). The risk-return paradox for strategic management: Disentangling true and spurious effects. Strategic Management Journal 30: 287–303.

    Article  Google Scholar 

  • Hofer C, Schendel D. (1978). Strategy Formulation: Analytical Concepts. West Publishing: St. Paul, MN.

    Google Scholar 

  • Jegers M. (1991). Prospect theory and the risk-return relation: Some Belgian evidence. Academy of Management Journal 34: 215–225.

    Article  Google Scholar 

  • Kahneman D, Tversky A. (1979). Prospect theory: An analysis of decisions under risk. Econometrica 47: 263–291.

    Article  Google Scholar 

  • Kahneman D, Tversky A. (1984). Choices, values, and frames. American Psychologist 39: 341–350.

    Article  Google Scholar 

  • Lehner JM. (2000). Shifts of reference points for framing of strategic decisions and changing risk-return associations. Management Science 46: 63–76.

    Article  Google Scholar 

  • March JG, Shapira Z. (1987). Managerial perspectives on risk and risk taking. Management Science 33: 1404–1418.

    Article  Google Scholar 

  • March JG, Shapira Z. (1992). Variable risk preferences and the focus of attention. Psychological Review 99: 172–183.

    Article  Google Scholar 

  • Miller KD. (1998). Economic exposure and integrated risk management. Strategic Management Journal 19(5): 497–514.

    Article  Google Scholar 

  • Miller KD, Bromiley P. (1990). Strategic risk and corporate performance: An analysis of alternative risk measures. Academy of Management Journal 33: 756–779.

    Article  Google Scholar 

  • Miller KD, Chen W. (2003). Risk and firms’ costs. Strategic Organization 1: 355–382.

    Article  Google Scholar 

  • Miller KD, Chen W. (2004). Variable organizational risk preferences: Tests of the March-Shapira model. Academy of Management Journal 47: 105–115.

    Article  Google Scholar 

  • Mintzberg H. (1978). Patterns in strategy formation. Management Science 24(9): 934–948.

    Article  Google Scholar 

  • Mintzberg H. (1994). The fall and rise of strategic planning. Harvard Business Review 72(1): 107–114.

    Google Scholar 

  • Oviatt BM, Bauerschmidt AD.(1991). Business risk and return: A test of simultaneous relationships. Management Science 37: 1405–1423.

    Article  Google Scholar 

  • Pablo AL, Sitkin SB, Jemison DB. (1996). Acquisition decision-making processes: The central role of risk. Journal of Management 22: 723–746.

    Article  Google Scholar 

  • Palmer TB, Wiseman RM. (1999). Decoupling risk taking from income stream uncertainty: A holistic model of risk. Strategic Management Journal 20(11): 1037–1062.

    Article  Google Scholar 

  • Pennings J. (1987). Structural contingency theory: A multivariate test. Organization Studies 8: 223–240.

    Article  Google Scholar 

  • Porter M. (2008). The five competitive forces that shape strategy. Harvard Business Review 86(1): 78–93.

    Google Scholar 

  • Ruefli TW. (1990). Mena-variance approaches to the risk-return relationship in strategy: Paradox lost. Management Science 36: 368–380.

    Article  Google Scholar 

  • Ruefli TW, Collins JM, LaCugna JR. (1999). Risk measures in strategic management research: Auld lang syne? Strategic Management Journal 20(2): 167–194.

    Article  Google Scholar 

  • Ruefli TW, Wiggins RR. (1994). When mean square error becomes variance: A comment on ‘Business risk and return: a test of simultaneous relationships’. Management Science 40: 750–759.

    Article  Google Scholar 

  • Shapira Z. (1995). Risk Taking: A Managerial Perspective. Russell Sage: New York.

    Google Scholar 

  • Siggelkow N. (2001). Change in the presence of fit: The risk, the fall, and the renaissance of Liz Claiborne. Academy of Management Journal 44: 838–857.

    Article  Google Scholar 

  • Sinha T. (1994). Prospect theory and the risk return association: Another look. Journal of Economic Behavior and Organization 24: 225–585.

    Article  Google Scholar 

  • Sitkin SB, Pablo AL. (1992). Reconceptualizing the determinants of risk behavior. Academy of Management Review 17: 9–38.

    Google Scholar 

  • Sneier R, Miccolis J. (1998). Enterprise risk management. Strategy and Leadership 26: 11–16.

    Google Scholar 

  • Teece DJ. (2007). Explicating dynamic capabilities: The nature and microfoun-dations of (sustainable) enterprise performance. Strategic Management Journal 28: 1319–1350.

    Article  Google Scholar 

  • Teece DJ, Pisano G, Shuen A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal 18(7): 509–533.

    Article  Google Scholar 

  • Tversky A, Kahneman D. (1986). Rational choice and the framing of decisions. Journal of Business 59: S251–S278.

    Article  Google Scholar 

  • Wang H, Barney JB, Reuer JJ. (2003). Stimulating firm-specific investment through risk management. Long Range Planning 36: 49–59.

    Article  Google Scholar 

Download references

Authors
  1. Torben J. Andersen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Richard A. Bettis
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Copenhagen Business School, Denmark

    Torben Juul Andersen

Copyright information

© 2014 Torben J. Andersen and Richard A. Bettis

About this chapter

Cite this chapter

Andersen, T.J., Bettis, R.A. (2014). The Risk-Return Outcomes of Strategic Responsiveness. In: Andersen, T.J. (eds) Contemporary Challenges in Risk Management. Palgrave Macmillan, London. https://doi.org/10.1057/9781137447623_4

Download citation

Publish with us

Policies and ethics

Search

Navigation