On the Relationship between Accounting Risk and Return: Is There a (Bowman) Paradox?

13 Pages Posted: 23 Jul 2015

See all articles by Ivan E. Brick

Ivan E. Brick

Rutgers Business School

Oded Palmon

Rutgers Business School

Itzhak Venezia

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: Summer 2015

Abstract

Bowman's (1980, 1982, 1984) finding of a negative relationship between the means and variances of accounting returns (the Bowman Paradox) spurred a considerable literature analyzing this phenomenon. The sign of the relationship between the mean return on equity (ROE) and its standard deviation remains unresolved. Concerns were raised about ROE measurement and statistical techniques used in establishing the paradox. The papers critiquing (and supporting) it were mostly limited in scope, studied only short periods of time and provided limited robustness checks. In addition, no paper considered the effect of issuances and repurchase of stocks on the measurement of ROE. This study revisits the Paradox and addresses the above mentioned deficiencies in prior research. We use data from longer periods, control for size and leverage and provide additional robustness checks. We conclude that a positive relationship between mean ROE and its standard deviation is far more likely than a negative one.

Keywords: Risk‐return relationship, accounting and financial ratios, accruals, Bowman Paradox, issuances and purchases of equity

Suggested Citation

Brick, Ivan E. and Palmon, Oded and Venezia, Itzhak, On the Relationship between Accounting Risk and Return: Is There a (Bowman) Paradox? (Summer 2015). European Management Review, Vol. 12, Issue 2, pp. 99-111, 2015, Available at SSRN: https://ssrn.com/abstract=2634748 or http://dx.doi.org/10.1111/emre.12045

Ivan E. Brick (Contact Author)

Rutgers Business School ( email )

111 Washington Avenue
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973-353-5155 (Phone)
973-353-1233 (Fax)

Oded Palmon

Rutgers Business School ( email )

Room 5123
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848-445-4209 (Phone)
848-445-3907 (Fax)

Itzhak Venezia

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

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