The Impact of the Negative Relation between Accounting Measures of Risk and Return on the Expected Market Return
El Impacto de la Relación Negativa entre Rentabilidad y Riesgo Medidos Contablemente en la Rentabilidad de Mercado
Abstract
During the last few years, the importance of the research on Bowman’s Paradox -the negative relationship between accounting measures of risk and return- has grown. Nevertheless, research has mostly been focused on studying the causes of the negative accounting relation, instead of explaining how, two different types of risk-return relationship can coexist: negative for the accounting indicators and positive for the market indicators. In this study, we develop a mathematical model, based on the Residual income Valuation Model for making both kinds of relations compatible. Our results show that there exists a positive relationship between the accounting measures of risk and the market measures of risk and return, but a negative influence of the accounting profitability on both market variables.
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