Is Bowman’s paradox an empirical artifact? Evidence from Asian emerging countries

Abstract

Purpose

This study aims to reconcile and address Bowman’s paradox empirical criticism from the lens of financial theory, corporate strategy and their econometric adversaries based on three issues, i.e. risk conceptualization, measurement and econometric modeling in Asian emerging countries (AEC).

Design/methodology/approach

The study is conducted on panel data sampling from 2,872 firms across four Asian Emerging Countries (AEC) and employs a two-stage least squares (2SLS) estimation technique. We proposed a theoretical framework based on triangulation that outlines four risk-return relationships based on proxies derived from capital market and firm-level data and used different econometric models to answer Bowman’s paradox ongoing criticism.

Findings

The empirical results negate the empirical artifact viewpoint in AEC. The risk-return relationship estimated on firm accounting-based ratios or its combination with market-based measures supports Bowman’s paradox and thus upholds the corporate strategy point of view. Whereas the risk-return relationship based on market-based ratios upholds the financial theory point of view. However, the results are mixed when risk is subdivided into systematic and business risk. Our results are robust across standard deviation and semi-standard deviation-based measures of risk, and there is no evidence of a non-linear relationship.

Originality/value

A compelling debate exists that Bowman’s paradox is an empirical artifact. We provide an innovative approach that aims to reconcile and address the ongoing debate by employing diverse risk-return proxies and econometric models in Asian emerging countries. Methodological issues such as endogeneity, sample biases, temporal fluctuations, downside risk variations, multiple moments of a variable and model misspecification are also addressed. This triangulation enhances the robustness of our analysis, providing a comprehensive perspective on AEC and laying the groundwork for future researchers to explore Bowman’s paradox through alternative measures and models.

Citation

Khan, A., Rehman, Z.u., Badshah, I. and Khan, M.I. (2024), "Is Bowman’s paradox an empirical artifact? Evidence from Asian emerging countries", Managerial Finance, Vol. 50 No. 12, pp. 2071-2090. https://doi.org/10.1108/MF-04-2024-0269