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

Abstract

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.

Keywords

• risk-return
• Bowman’s paradox
• prospect theory
• bull and bear
• operating performance
• risk measures