Does managerial myopia explain Bowman's Paradox?

Abstract

Purpose - This paper investigates if Bowman’s Paradox (negative association between risk and return) is caused by managerial myopia. It also attempts to disentangle whether results are more consistent with one or more potential explanations. Design/methodology/approach - The paper uses univariate statistics and OLS regressions. Empirically examines the relationship between four risk and return proxies, across a wide ranging time period and utilizing a number of model specifications. Results hold after using three-way clustered errors and using a more robust rolling five year, fixed regression methodology measure. Findings - Confirms the existence of the Paradox. Also documents that the association between risk and return is positive in “winner” firms and negative in “loser” firms. Upon further analysis, the earlier negative risk-return relationship is found to entirely be due to the volatility of the (short term) income statement component of the performance terms. Results imply that executives of winner (loser) firms are less (more) likely to manage earnings or engage in other value destroying activities. Research limitations/implications - The study is confined by the typical archival study limitations; including potential endogeneity, selection biases and generalizability of the results. Practical implications - Anecdotal evidence indicates that the business community makes extensive use of these performance measures. These performance measures are also pervasive in academic research. Given the importance of controlling for both managerial and firm performance, a good performance proxy is quintessential. Originality/value - Although over 30 years have passed since Bowman (1980) first observed the negative correlation, to date, no consensus explanation exists. Findings suggest that Bowman’s Paradox, is potentially a manifestation of managerial myopia. Thus, this result contributes to several existing research streams.