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Business & Economics

RISK AND RETURN ANALYSIS: EVIDENCE FROM EMERGING MARKETS
Marilen Pirtea, Claudiu Botoc, Cecilia Jurcut

ABSTRACT.The relationship between risk and return is a cornerstone in finance theory. Risk is an issue that companies encounter in running their business every day. It can be generally defined as the possibility that the expected return not to be obtained. For the companies, to balance risk and return can be a complicated procedure. The main aim of the paper is to test the relation between risk and return of companies from several emerging markets. The study covers the period 2003-2010 and use standard deviation as a proxy for risk, return on assets as a proxy for return and capital structure was included as control variable. The results suggest that risk is negatively associated with return, as the literature that supports Bowman's paradox shows. Regarding control variable, it is positively associated with risk and when it is added in extended models, it does not affect the significance of variable of interest. Some possible explanations for this negative relation are related to contingencies that influence the risk behaviour of organizational decision-makers, outcomes from strategic conduct and statistical artefacts.

KEYWORDS: risk, standard deviation, return on assets, capital structure, GMM-System estimator.

JEL classification: G32, L25.