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Shifts of Reference Points for Framing of Strategic Decisions and Changing Risk-Return Associations

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  • Johannes M. Lehner

    (Institut für Unternehmensführung, Forschungsschwerpunkt Organisation, University of Linz, Altenbergerstrasse 69, A-4040 Linz, Austria)

Abstract

Previous results on nonlinear risk-return associations, predicted by prospect theory, are replicated with mean quadratic differences instead of variance as a measure of risk. In contrast to assumptions of these studies, results with a sample from the COMPUSTAT-database provide evidence that at least a minority of firms shift to individual reference levels, which are represented here through levels of minimal risk. Further, changes of environmental conditions as an alternative explanation for switching risk-return relationships are tested against prospect theory predictions. It is shown that risk-return relationships remain stable as long as the relative position to the individual reference level is stable. This explains switching risk-return relationships better than changing environmental conditions.

Suggested Citation

  • Johannes M. Lehner, 2000. "Shifts of Reference Points for Framing of Strategic Decisions and Changing Risk-Return Associations," Management Science, INFORMS, vol. 46(1), pages 63-76, January.
    • Handle: RePEc:inm:ormnsc:v:46:y:2000:i:1:p:63-76
    DOI: 10.1287/mnsc.46.1.63.15130
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