Bowman's risk-return relationship: Empirical evidence in a frontier market


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This paper investigates whether there exists a Bowman paradox on the relationship between risk-return for Vietnamese firms. Data in the annual audited financial statements from 2017 to 2020 of 727 enterprises listed on the Vietnamese stock market are used in this study. The data set is divided into two different groups based on the reference point, which is the average return of the whole market and by industry. Correlation analysis and ordinary least square regression according to cross sectional data were performed in this study. After controlling for size, debt-to-total assets, and debt-to-equity ratios, the research results show that the risk-return relationship of the two groups of firms is mixed and can be explained by prospect theory. There exists Bowman's paradox for a group of firms whose return is below the reference point, these firms tend to seek risk versus return, so their risk-return relationship is negative. In contrast, this relationship is positive for the group of firms whose returns are above the reference point, or which tend to avoid risk. The slope coefficient of the group of enterprises below the reference point compared to the rest of enterprises is 2.5:1, which correctly reflects the ratio of the risk-seeking area to the risk-avoiding area in prospect theory.

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    • Table 1. Statistics of two groups of companies classified based on market reference points (median ROA= +4.44%)
    • Table 2. Statistics of two groups of companies classified based on the reference point of each industry
    • Table 3. Correlation results between pairs of variables by market level
    • Table 4. Correlation results between pairs of variables by industry level
    • Table 5. Regression results classified by market level
    • Table 6. Regression results classified by industry level
    • Conceptualization
      Lai Cao Mai Phuong
    • Data curation
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    • Formal Analysis
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    • Methodology
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    • Resources
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    • Validation
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    • Writing – original draft
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    • Writing – review & editing
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