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

Article


Santacruz, Lujer. 2020. "Measures of firm risk-taking: revisiting Bowman’s paradox." Managerial Finance. 46 (3), pp. 421-434. https://doi.org/10.1108/MF-09-2019-0466
Article Title

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

ERA Journal ID19584
Article CategoryArticle
Authors
AuthorSantacruz, Lujer
Journal TitleManagerial Finance
Journal Citation46 (3), pp. 421-434
Number of Pages14
Year2020
Place of PublicationUnited kingdom
ISSN0307-4358
1758-7743
Digital Object Identifier (DOI)https://doi.org/10.1108/MF-09-2019-0466
Web Address (URL)https://www.emerald.com/insight/content/doi/10.1108/MF-09-2019-0466/full/html
Abstract

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.

KeywordsBowman’s paradox, firm risk-taking, risk measure, risk and returns
ANZSRC Field of Research 2020380107. Financial economics
Public Notes

Files associated with this item cannot be displayed due to copyright restrictions.

Byline AffiliationsSchool of Commerce
Institution of OriginUniversity of Southern Queensland
Permalink -

https://research.usq.edu.au/item/q58zz/measures-of-firm-risk-taking-revisiting-bowman-s-paradox

  • 158
    total views
  • 8
    total downloads
  • 3
    views this month
  • 0
    downloads this month

Export as

Related outputs

Asset class return connectedness during the last two global shocks GFC and Covid
Santacruz, Lujer. 2021. "Asset class return connectedness during the last two global shocks GFC and Covid." 2021 Financial Planning Academics Forum. Brisbane, Australia 26 Nov 2021
Toward a practical measure of firm risk-taking: revisiting Bowman’s paradox
Santacruz, Lujer. 2018. "Toward a practical measure of firm risk-taking: revisiting Bowman’s paradox ." 31st Australasian Finance and Banking Conference. Sydney, Australia 13 - 15 Dec 2018 Sydney, Australia.
Wealth management and financial advisory services in the Asia-Pacific region
Santacruz, Lujer. 2017. "Wealth management and financial advisory services in the Asia-Pacific region." 8th Global Business and Finance Research Conference. Taipei, Taiwan 26 - 28 Oct 2017
Wealth management and financial advisory services in the Asia-Pacific region
Santacruz, Lujer. 2018. "Wealth management and financial advisory services in the Asia-Pacific region." The Journal of Wealth Management. 21 (3), pp. 95-115. https://doi.org/10.3905/jwm.2018.1.066
Asset allocation: analysis of theory and practice in the Australian investment management industry
Santacruz, Lujer. 2014. "Asset allocation: analysis of theory and practice in the Australian investment management industry." 27th Australasian Finance and Banking Conference (AFBC 2014). Sydney, Australia 16 - 18 Dec 2014 Sydney, Australia.
Dealer group or financial planning group? A brief technical note
Santacruz, Lujer. 2011. "Dealer group or financial planning group? A brief technical note." Australasian Accounting Business and Finance Journal. 5 (2), pp. 127-134.
Dealer group or financial planning group?
Santacruz, Lujer. 2011. "Dealer group or financial planning group?" Financial Planning. 23 (10), pp. 42-45.
Strategic asset allocation and portfolio performance
Santacruz, Lujer. 2012. "Strategic asset allocation and portfolio performance." 18th International Business Research Conference. Las Vegas, NV. United States 28 - 30 Oct 2012 Australia.
Corporate risk returns and economic outlook, Australian data
Santacruz, Lujer. 2016. "Corporate risk returns and economic outlook, Australian data." 29th Australasian Finance and Banking Conference (AFBC 2016). Sydney, Australia 14 - 16 Dec 2016 Sydney, Australia.
Asset allocation theory and practice in Australian investment management: reasons for the dichotomy
Santacruz, Lujer. 2016. "Asset allocation theory and practice in Australian investment management: reasons for the dichotomy." The Journal of Wealth Management. 19 (3), pp. 31-48. https://doi.org/10.3905/jwm.2016.19.3.031
Asset allocation theory and practice in Australian investment management
Santacruz, Lujer. 2016. "Asset allocation theory and practice in Australian investment management." The Journal of Wealth Management. 19 (2), pp. 47-67.
Asset allocation: analysis of theory and practice in the Australian investment management industry
Santacruz, Lujer. 2015. Asset allocation: analysis of theory and practice in the Australian investment management industry. PhD Thesis Doctor of Philosophy. University of Southern Queensland.
Financial planning value proposition: Laying the groundwork based on clients’ perspective
Santacruz, Lujer and Brimble, Mark. 2014. "Financial planning value proposition: Laying the groundwork based on clients’ perspective." 3rd Annual Personal Finance and Investment Symposium. Adelaide, South Australia 11 Nov 2015
What do academics think of asset allocation theory?
Santacruz, Lujer. 2014. "What do academics think of asset allocation theory?" Bhuiyan, Md. Mahbubul Hoque (ed.) World Business, Finance and Management Conference (WBFM 2014): Research for Progress. Auckland, New Zealand 08 - 09 Dec 2014 Melbourne, Australia.
The importance of strategic asset allocation
Santacruz, Lujer. 2013. "The importance of strategic asset allocation." Journal of Business and Economics. 4 (3), pp. 242-247.
Investor risk tolerance and general economic mood
Santacruz, Lujer. 2008. "Investor risk tolerance and general economic mood." Hoque, Mohammad Ziaul (ed.) 9th International Business Research Conference. Melbourne, Australia 24 - 26 Nov 2008 Melbourne, Australia.
Dealer group or financial planning group? A case for changing the industry terminology
Santacruz, Lujer. 2010. "Dealer group or financial planning group? A case for changing the industry terminology." Jahan, Nuha (ed.) 13th International Business Research Conference. Melbourne, Australia 22 - 24 Nov 2010 Melbourne, Australia.
Personal financial planning in Australia: an industry analysis
Santacruz, Lujer and Lukashenok, Aleksej. 2009. "Personal financial planning in Australia: an industry analysis." Benson, Karen and Ding, David (ed.) AsianFA 2009: Asian Finance Association International Conference. Brisbane, Australia 30 Jun - 03 Jul 2009 Brisbane, Australia.
Effect of general economic mood on investor risk tolerance - implications for financial planning
Santacruz, Lujer. 2009. "Effect of general economic mood on investor risk tolerance - implications for financial planning." JASSA. 2009 (1), pp. 35-42.
Are benchmark asset allocations for Australian private investors optimal?
Santacruz, Lujer and Phillips, Peter J.. 2009. "Are benchmark asset allocations for Australian private investors optimal?" The Journal of Wealth Management. 12 (2), pp. 60-70. https://doi.org/10.3905/JWM.2009.12.2.060
Optimality of financial planning clients' strategic asset allocation
Santacruz, Lujer and Phillips, Peter J.. 2007. "Optimality of financial planning clients' strategic asset allocation." Moshirian, Fariborz (ed.) 20th Annual Australasian Finance and Banking Conference (AFBC 2007). Sydney, Australia 12 - 14 Dec 2007 Sydney, Australia.
Direct share ownership as a diffusion phenomenon
Santacruz, Lujer. 2007. "Direct share ownership as a diffusion phenomenon." Hoque, Mohammad Ziaul (ed.) 7th International Business Research Conference. Sydney, Australia 03 - 06 Dec 2007 Melbourne, Australia.