Does managerial myopia explain Bowman’s Paradox?

Holder, Anthony Dewayne; Petkevich, Alex; Moore, Gary

doi:10.1108/ajb-04-2015-0008

Cited by 10 publications

(21 citation statements)

References 40 publications

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“…It is also evident that the PT implications are contingent on return measures used, in both firm-and industry-adjusted cases for 1-year (short-term) and 5-year (long-term) longitudinal studies. These substantiate earlier individual works of (Bae et al 2012;Chou et al 2009;Fiegenbaum andThomas 1988, 2004;Díez-Estebana et al 2017;Holder et al 2016;Kliger and Tsur 2011;Li et al 2013;etc. ) in narrow contexts with a broad international context.…”

Section: Discussionsupporting

confidence: 85%

“…3 However, they have done it in a narrow context only for OECD countries. Holder et al (2016) confirms paradox's existence by stating that association between risk and return is positive in "winner" firms and negative in "loser" firms. Further analysis proves that the earlier negative risk-return relationships are to be entirely due to volatility of the income statement components (i.e., short-term) of the performance terms.…”

Section: Literature Reviewmentioning

confidence: 71%

“…, Fiegenbaum 1990;Fiegenbaum and Thomas 1988;Lee 1997;Lehner 2000;Miller and Bromiley 1991;etc. to name a few) frequently use it in explaining a firm's decision-making also. They document positive association (Fisher and Hall 1969); negative coefficients (Armour and Teece 1978;Díez-Estebana et al 2017;Holder et al 2016;Fiegenbaum andThomas 1988, 2004;Miller and Chen 2003;etc. ); and mixed results conditional to industry membership or firm conduct (Bettis and Hall 1982;Bowman 1980).…”

Section: Introductionmentioning

confidence: 99%

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Firm’s Risk-Return Association Facets and Prospect Theory Findings—An Emerging versus Developed Country Context

Gupta¹,

Pathak²

2018

Risks

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A risk-return association under normal market conditions can be conventional positive (risk-averse) or "paradoxical" negative (risk seeking). This study has the objective to investigate whether such an association is stable across market trends (i.e., bull and bear) and for overall, industry-classified and partitions sub-samples after controlling for a firm's age, size, leverage and liquidity using operating performance risk-return measures. In total, this study analyses 2666 firms (1199 firms from 15 developed countries and 1467 firms from 12 emerging countries) for the period of 1999-2015. Results show that in the overall and bull sub-periods, firms across countries are showing conventional positive (superior firms) and "paradoxical" negative (poor firms) in most cases. However, in the bear sub-periods all firms from emerging countries are risk seeking in order to maintain their position in the pecking order.Empirical literature associates managers' risk behavior with assumptions of rational behavior, outcome weighing and utility maximization. Financial theory also posits that risk-averse behavior manifests when low risk is associated with low return, as well as when high risk is rewarded by high return (Fisher and Hall 1969). This risk-averse outlook also assumes that for each strategic alternative, firms and managers would choose the alternative which maximizes utility (Schoemaker 1982). Aaker and Jacobson (1987) find support for a positive association between performance and both systematic and unsystematic risk, when risk is defined using accounting data. A number of other studies have also found support for a positive risk-return relationship (Bettis 1981).To provide a theoretical lens to explain the negative association between risk and return, scholars have drawn motivation from prospect theory (Fiegenbaum and Thomas 1988;Kahneman and Tversky 1979) and behavioral theory of the firm (Bromiley 1991). Under the behavioral theory of the firm, managers undertake more risk when performance is below aspiration, and they take low risk when performance is above aspirations. Due to the contemporaneous association between risk-taking and low performance, this relationship could be negative. This is due to lower performance and higher risk in cross-sectional accounting data, or lagging effects of risk and performance would continue in the short-term in longitudinal accounting data. On the other hand, prospect theory (Kahneman and Tversky 1979) studies argue that managers in low performing firms face negatively framed prospects and are thus more likely to undertake high risk. In contrast, managers in high-performing firms face positively framed prospects and take low risk. Both of these results would cause negative correlation between high performance and low risk. Thus, prospect theory and behavioral theory of the firm provide possible explanations for the negative risk-return relationships.The research hypotheses in these studies emphasizes on manager's and/or firm's attainment of above (below) returns in compariso...

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Section: Discussionsupporting

confidence: 85%

Section: Literature Reviewmentioning

confidence: 71%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Firm’s Risk-Return Association Facets and Prospect Theory Findings—An Emerging versus Developed Country Context

Gupta¹,

Pathak²

2018

Risks

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“…Consistent with prospect theory, results using Compustat data show that firms with returns above their reference levels take less risk than firms with returns below their reference levels (Kliger and Tsur, 2011). More recently, it was documented that the relationship between risk and return is positive in winner firms and negative in loser firms (Holder et al, 2016). However, there are questions on the application of prospect theory to organisational contexts as it was developed with a different set of assumptions to explain individual behaviour (Bromiley and Rau, 2010).…”

Section: Theoretical Explanations For Bowman's Paradoxmentioning

confidence: 65%

Measures of firm risk-taking: revisiting Bowman’s paradox

Santacruz

2019

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Purpose The purpose of this paper is to contribute to the existing literature on the relationship between firm-level risk and returns and to explore other ways of measuring firm risk-taking. Literature overwhelmingly shows a negative relationship between firm-level risk and returns based on accounting data, which is counter-intuitive from the rational perspective of risk-aversion. This paper revisits this so-called Bowman’s paradox by examining the wealth of literature on the topic and empirically tests alternative measures of firm risk-taking that could provide a counter-argument on the existence of the paradox. Design/methodology/approach After formulating the criteria for such a measure, potential measures of firm risk-taking were developed based on variability of some key financial ratios and empirically tested using US listed companies’ data for several time periods from 1992 to 2016. Literature has explored the use of these financial ratios (e.g. R&D expenses as percentage of sales) based only on their magnitude. This paper is novel in that it examines the variability and not just the magnitude of these parameters. Findings Results showed the same counter-intuitive negative relationship between firm risk-taking and returns but the paper was able to identify an area for future theory development that hopefully will lead to a firm risk-taking measure that would exhibit the elusive positive relationship with returns. Originality/value The literature review of this paper brought together and provided a succinct classification of the various explanations for Bowman’s paradox that allowed the identification of a potentially rich area of research. It identified a gap in the literature which is the formulation of suitable measures of firm risk-taking and made investigations in this area.

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“…Some scholars have raised concerns that these empirical findings are artifacts of spurious correlations (e.g., Henkel, 2009). Yet, even when correcting for spurious correlations, recent empirical studies continue to find evidence for negative and U‐shaped risk–return relations (see, e.g.. Holder, Petkevich, & Moore, 2016; Patel et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

Industry competition and firm conduct: Joint determinants of risk–return relations

Christensen

Knudsen

Nash

et al. 2020

Strategic Management Journal

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In this study, we offer a novel approach, establishing how firm conduct and competitive interactions among firms jointly provide microfoundations of risk-return relations. Firms influence each other, and the way they reciprocate these influences to cause mutual adjustments is a core feature of industry dynamics. This core feature fundamentally influences risk-return relations. Based on our approach, we develop models that allow us to trace how, at the microlevel, firm conduct in conjunction

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Does managerial myopia explain Bowman’s Paradox?

Cited by 10 publications

References 40 publications

Firm’s Risk-Return Association Facets and Prospect Theory Findings—An Emerging versus Developed Country Context

Firm’s Risk-Return Association Facets and Prospect Theory Findings—An Emerging versus Developed Country Context

Measures of firm risk-taking: revisiting Bowman’s paradox

Industry competition and firm conduct: Joint determinants of risk–return relations

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