The objective of this study is to analyse NSE 500 firms’ risk-attitudes from a behavioural perspective, specifically in light of Bowman’s (1980) paradox. To fulfil this objective, it examines Kahneman and Tversky’s (1979) and Tversky and Kahneman’s (1992) prospect theory implications in these firms. This theory emphasises the role of reference or target return levels in analysing risky choices. This study hypothesises that below median (i.e. reference return level) firms incline to be risk-seeking in light of Bowman’s paradoxical negative risk-return association, and firms above the reference return level would be risk-averse. To investigate the risk-return association, this study uses accounting variables, namely, return on assets (i.e. ROA), return on shareholders’ equity (i.e. ROE), and the capital ratio (i.e. CR) of NSE 500 firms over the period 2001-2015. Both firm and cross-sectional industry mean returns for preceding five years on a rolling basis are used to calculate the target return to measure distance from such targets (return measure) in line with Fishburn’s (1977) concept. Kendall’s (1938) correlation test is used to measure the correlations between such distance and the standard deviation (risk measure) of the accounting variables for the overall sample and controlled sector, size, age and risk sub-samples. For the purpose of robustness, this study also develops a multi-variate model with risk as the dependent variable. On an overall basis, Indian firms as represented by NSE 500 show significant presence of the prospect theory implications, and below median firms exhibit presence of Bowman’s (1980) risk-return paradox. This is true for both the firm’s own and cross-sectional industry mean target return benchmarks. So, the risk-seeking attitude of firms below median and the risk-averse behaviour of superior performers are clearly evident from study results. The robustness of correlation results is also authenticated by multi-variate results. We submit that this is the first study on Indian firms dealing with their risk-attitudes from the prospect theory and Bowman’s risk-return paradox perspectives. So, the results would serve as a guide to influence future empirical studies on this issue in a broader Indian and larger emerging market context. Also, it will be of immense help to these firms and their managers, capital market practitioners, shareholders and regulators to work on their respective functional domains and skills in regard to their planning and decision-making in this context.
