Corporate Risk-Return Relations: Returns Variability Versus Downside Risk

Abstract

This study tested a model of firm risk-return relations in which risk was conceptualized in terms of downside outcomes. Drawing on the behavioral theory of the firm, we developed a set of hypotheses involving downside risk, return, and organizational slack. The hypothesized risk and return relations were tested using both downside risk and the conventional standard deviation of returns. The results indicate downside risk results in improved subsequent performance. Performance shows a negative relation with subsequent downside risk.