Workshop Series: Manuel Becerra
Exploring the Dynamics of the Negative Relationship between Risk and Return: Firm Performance Unpredictability of High versus Low Performers. The observed negative relationship between risk and firm performance has puzzled researchers in strategy and finance for the past few decades, often referred to as the "Bowman paradox." Several theories have been used to explain this paradoxical ex-post relationship, including potential methodological problems in the accumulated empirical research. In our panel analysis of U.S. firms between 1991 and 2010 we explicitly address the causal implications and endogeneity concerns about the negative risk/return relationship. We argue that firms with higher performance are inherently less risky and it is easier to forecast their future performance because they are less affected by (1) the degree of competition and (2) the business cycle, in addition to (3) having less motivation to change their strategy, in line with prospect theory. We find support for our explanation of the Bowman paradox and we also provide evidence of a positive delayed effect of risk-taking on future performance in the medium horizon, using analyst forecast surprises as a proxy for firm risk-taking.
Manuel Becerra (Ph.D. Maryland) holds the Accenture Chair in Strategic Management at the IE Business School (Instituto de Empresa, Madrid). He has published numerous articles on strategic management in journals like Academy of Management Review, Academy of Management Journal, Organization Science, Journal of Finance, and other outlets. His current research focuses on issues of corporate strategy, value creation, risk, and trust. His book Theory of the firm for strategic management was recently published by Cambridge University Press in 2009. In addition to his research activities, he was recognized with the Teaching Excellence Award 2005-08 at IE Business School for his teaching in MBA, doctoral, and executive-level programs.
He is currently on sabbatical at the University of Queensland Business School.