Risk and Return in Organizational Decision Making

Abstract

Examining the association between managerial assessments of risk and expected return using nonexperimental data from specific commercial lending decisions, we found that risk-return associations depended on the measures used. However, with a return measure that accounted for the expected costs of riskier decisions, risk and return were negatively related. We also found evidence of conservatism in managers’ adjusting to new information regarding the riskiness of decisions. The study points toward the need for more careful understanding of managerial definitions of risk and return, careful handling of leads and lags, and understanding risky decisions in their organizational and market contexts.