Risk and return: New insights for theory, measurement and management

Abstract

This study investigates the risk-return relationship by using an ordinal strategic risk measure of risk rather than the more conventional variance-based measures. A set of hypotheses is specified linking ordinal strategic risk, return, and organizational slack. Empirical results are interesting in that they allow elaborating the idea that strategic risk may have a positive effect on subsequent performance and that performance has a negative effect on subsequent risk. Such a self-correcting cycle offers an interesting contrast to the "vicious circle" proposed by previous risk-return research based on prospect theory. Overall, this paper suggests that new conceptual and methodological risk approaches are needed to better understand the risk taking process in organizations.