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When Mean Square Error Becomes Variance: A Comment on "Business Risk and Return: A Test of Simultaneous Relationships"

Author

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  • Timothy W. Ruefli

    (Department of Management, Graduate School of Business, The University of Texas, Austin, Texas 78712)

  • Robert R. Wiggins

    (IC² Institute, The University of Texas, Austin, Texas 78712)

Abstract

In a recent article, Oviatt and Bauerschmidt (1991) investigated risk-return relationship by employing the square root of the mean square error of returns as a measure of risk and found no significant relationship existed in those terms. Ruefli (1991) has suggested that under the assumption of stable distributions there is the possibility of spurious correlation in estimating the risk-return relationship in mean-variance terms. This comment identifies the commonalities between mean square error and variance measures, shows that the former measure is subject to many of the problems of the latter, and presents further evidence regarding the likelihood of spurious correlation in industry studies of risk and return. The results suggest an alternative and more parsimonious explanation for Oviatt and Bauerschmidt's findings as well as for the findings reported in the wider strategic management research literature.

Suggested Citation

  • Timothy W. Ruefli & Robert R. Wiggins, 1994. "When Mean Square Error Becomes Variance: A Comment on "Business Risk and Return: A Test of Simultaneous Relationships"," Management Science, INFORMS, vol. 40(6), pages 750-759, June.
    • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:6:p:750-759
    DOI: 10.1287/mnsc.40.6.750
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    Citations

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    Cited by:

    1. Metin Coskun & Gulsah Kulali, 2016. "Relationship between Accounting Based Risk and Return: Analysis for Turkish Companies," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(4), pages 240-240, March.
    2. Yan Li & Neal M. Ashkanasy, 2019. "Risk adaptation and emotion differentiation: An experimental study of dynamic decision-making," Asia Pacific Journal of Management, Springer, vol. 36(1), pages 219-243, March.
    3. Robert R. Wiggins & Timothy W. Ruefli, 2002. "Sustained Competitive Advantage: Temporal Dynamics and the Incidence and Persistence of Superior Economic Performance," Organization Science, INFORMS, vol. 13(1), pages 81-105, February.
    4. Nickel, Manuel Núñez & Rodriguez, Manuel Cano, 2002. "A review of research on the negative accounting relationship between risk and return: Bowman's paradox," Omega, Elsevier, vol. 30(1), pages 1-18, February.
    5. Henkel, Joachim, 2007. "The Risk-Return Paradox for Strategic Management: Disentangling True and Spurious Effects," CEPR Discussion Papers 6538, C.E.P.R. Discussion Papers.
    6. Giamouzi, Maria & Nomikos, Nikos K, 2021. "Identifying shipowners’ risk attitudes over gains and losses: Evidence from the dry bulk freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    7. Timothy W. Ruefli & Robert R. Wiggins, 2000. "Technical Note: Longitudinal Performance Stratification---An Iterative Kolmogorov-Smirnov Approach," Management Science, INFORMS, vol. 46(5), pages 685-692, May.
    8. Núñez-Nickel, Manuel & Cano Rodríguez, Manuel, 2002. "Comportamiento heterocedástico entre rentabilidad y riesgo," DEE - Documentos de Trabajo. Economía de la Empresa. DB db021710, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.

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    Keywords

    risk-return; strategic management;

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