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Rate of Return and Business Risk

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  • Paul H. Cootner
  • Daniel M. Holland

Abstract

This paper reports in succinct form the findings of a study undertaken a number of years ago that sought to measure the relation between risk and rate of return and, thus, to determine an empirical basis for implementing several Supreme Court decisions (Bluefield Waterworks Case, 1923, for one) that a public utility is entitled to earnings sufficient to permit its rate of return on invested capital to be similar to those in "other business undertakings which are attended by corresponding risks and uncertainties." Defining "business" risk as functionally related to the variability of earnings, a number of hypotheses concerning rate of return and risk are tested statistically, and a reasonable and significant association is discovered between them for both a sample of industries and individual companies. The statistical model, however, explains only about a quarter of the variability in rates of return among industries and firms, suggesting that it has not captured some important determinants of business risk. The final section examines our results in the light of recent developments in the theory of financial risk.

Suggested Citation

  • Paul H. Cootner & Daniel M. Holland, 1970. "Rate of Return and Business Risk," Bell Journal of Economics, The RAND Corporation, vol. 1(2), pages 211-226, Autumn.
    • Handle: RePEc:rje:bellje:v:1:y:1970:i:autumn:p:211-226
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    Cited by:

    1. Lun, Y.H. Venus & Browne, Michael & Lai, Kee-hung & Wong, Christina W.Y. & Cheng, T.C.E., 2011. "Examining the influence of firm performance on business risk-taking and the mediation effect of scale of operations in the container terminal industry," Research in Transportation Economics, Elsevier, vol. 32(1), pages 64-70.
    2. Díez-Esteban, José María & García-Gómez, Conrado Diego & López-Iturriaga, Félix Javier & Santamaría-Mariscal, Marcos, 2017. "Corporate risk-taking, returns and the nature of major shareholders: Evidence from prospect theory," Research in International Business and Finance, Elsevier, vol. 42(C), pages 900-911.
    3. DRAGHICI, Dalis Maria, 2021. "Implementing Quantitative Techniques In Assessing The Risk Attitudes," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 25(2), pages 64-78, June.
    4. Adam MALLA ISSIFOU & Yabi A Jacob, 2023. "Determinants of the economic profitability of peasant enterprises in rural areas of Borgou, Benin [Les déterminants de la rentabilité économique des entreprises paysannes en milieu rural dans le Bo," Post-Print hal-03961554, HAL.
    5. James A. Verbrugge & Steven J. Goldstein, 1981. "Risk Return, And Managerial Objectives: Some Evidence From The Savings And Loan Industry," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 4(1), pages 45-58, March.

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