Corporate risk returns and economic outlook, Australian data

The paper examines the relationship between accounting-based risk and return for Australian listed companies, on an aggregate basis and during economic upturns and downturns. A similar analysis conditioned on economic outlook is carried out for each industry grouping and also for each firm size grouping, recognising that any risk taking strategy would be dependent on the nature of the industry the company belongs to and the size of the firm. A causal regression model of firm risk and lagged return based on the Behavioural Theory of the Firm was utilised. A consistent significant negative relationship between accounting-based risk and return was observed across all industry groupings and firm size groupings except in the case of large companies. The results of the analysis are somewhat inconclusive and largely counterintuitive, consistent with the Bowman paradox on accounting risk-return relationship, but promising paths for research were identified in the paper