Chapter 6 Analyzing Manufacturing Subsamples

In this chapter, we perform more detailed analyses and present the distribution characteristics and risk-return relationships of accounting-based financial returns (ROA) across different industry contexts and between periods with different economic conditions. We first display the frequency diagrams of the return measure (ROA) and its two components, net income and total assets, that show entirely different contours in the density graphs that must be reconciled. This is partially accomplished by analyzing the skewness, kurtosis, cross-sectional, and longitudinal risk-return characteristics of each of the three variables. The analyses further considers potential effects of accounting manipulation, and different organizational and executive traits, that identifies significant effects on the accounting-based return measures. We find extremely left-skewed return distributions with high negative correlations between the average return and risk measures, which reproduces the “Bowman paradox” as originally conceived. The same analysis is performed on net income and operating cash flows, the latter being less susceptible to accounting manipulation, which should display similar effects even though these performance distributions show positive skewness. We find negative but insignificant cross-sectional risk-return relations that nevertheless reappear in analyses performed within the specific industry contexts. The study further uncovers effects from prevailing economic conditions where left-skewness and kurtosis as well as negative risk-return correlations are much more significant during periods of high economic growth and business expansion where competition is more pronounced.