Does Misery Impact Corporate Risk-Return Relationships?

Tiffany Jo Westfall, Aaron D. Crabtree


The prior behavioral theory of the firm research documents that a firm’s external environment impacts the risk-return relationship, suggesting that drivers outside the firm are part of the risk-return puzzle. This study examines whether firms’ misery scores impact the return relationship.  Using a sample of firm-year observations from 2002 to 2011, we investigate the relationship between the external environment related to misery and firms’ risk-return relationships by regressing five factors that proxy for firms’ external environments (e.g. misery levels) on risk and return.  Our results suggest that both economic and non-economic external environmental factors impact firms’ risk-return relationship.  Specifically, low unemployment rates and taxes are associated with higher levels of risk-taking, whereas greater access to leisure amenities decreases risk-taking.  A firm’s return is negatively impacted by risk-taking associated with low unemployment and taxes and greater access to education and healthcare.  However, a firm’s return is positively impacted by risk-taking associated with better air quality and lower property crime.  The results suggest that a firm’s external environment impacts its performance.  Therefore, future research may consider including location fixed effects to control for the unobservable external environmental factors that impact firm performance.  Second, the results are of interest to practitioners as businesses can utilize the findings to develop internal programs that neutralize the external environment’s effects on firm performance.

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Accounting and Finance Research
ISSN 1927-5986 (Print)   ISSN 1927-5994 (Online) Email:

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