Does prospect theory explain Bowman's paradox in Asian emerging markets?

Abstract

Purpose

This study aims to extend Bowman's risk–return paradox to Asian emerging markets and explain its causes under the prospect theory.

Design/methodology/approach

The study is conducted on a cross-sectional sample of 4,609 firms across nine Asian emerging countries. The two stage least squares (2SLS) estimation technique is used to evaluate the three objectives of the study, i.e. Bowman's risk–return paradox, significance of firm-specific risk and prospect theory explanation of Bowman's paradox.

Findings

The authors challenge the two basic financial economics arguments that higher risk is rewarded with higher return, and firm-specific risk is diversifiable. The empirical findings confirm the negative impact of firm-specific and systematic risk on firm return, thus, corroborates the Bowman's explanation of risk–return trade-off. However, the authors did not find empirical evidence to support prospect theory's explanations of Bowman’s paradox in Asian emerging markets.

Originality/value

A holistic approach is adopted to analyze the various aspects of Bowman's paradox and its causes for the same time period, variables and sample. The authors also rectified several methodological limitations observed in previous studies, i.e. the use of same proxies for firm return and risk, endogeneity and survivorship issues. Furthermore, the findings of this study will enable managers to formulate critical viewpoint on firm-specific risk and systematic risk and take informed strategic decisions regarding optimum utilization of their firm's key resources in Asian emerging markets.

Citation

Khan, A., Khan, M.I., Rehman, Z.u. and Khan, S. (2022), "Does prospect theory explain Bowman's paradox in Asian emerging markets?", Managerial Finance, Vol. 48 No. 7, pp. 1029-1046. https://doi.org/10.1108/MF-11-2021-0544