The researchers found that risk-return associations depended on the measures used by examining the association between managerial assessments of risk and expected return using non-experimental data from specific commercial lending decisions.
The study points toward the need for more careful understanding of managerial definitions of risk and return, careful handling of leads and lags, and understanding risky decisions in the marketplace. Within this study there is evidence of a conservative nature in managers' adjusting to new information regarding the risks of decision-making.
The researchers examined the relations between assessed risk and expected return as seen in the bank's annual review of each borrower. The study focuses on the risk-return relations found in a large set of borrow-back interactions within a single commercial bank.
Commercial lending provides an excellent site for risk studies for a multitude of reasons. First, commercial lending decisions provide data on explicit risk and expected return estimates covering many comparable judgment decisions. Second, commercial banks' decisions are important and involve substantial judgment. Third, the study cannot directly assess the plurality of the findings from the examination, but commercial lending parallels general risky business decisions in several ways. Fourth, the structure of the commercial lending decision process somewhat mirrors a range of other business decision processes. Not, surprisingly, the degree of managerial oversight and or micromanagement directly relates to the monetary value of the decision.
PURPOSE OF THE STUDY.
Unlike previous researchers they did not infer this relationship from outcome data. The authors' contribute to the managerial risk-return literature by examining specific business decisions using measures of expected risk and return. Also, using expected values of risk and return allowed the researchers to directly investigate whether managers anticipate receiving adequate return for riskier decisions.