| Abstract: | This article addresses some important issues in risk-return, or mean-variance, research. Much of the research in this tradition has used Kahneman and Tversky's prospect theory to explain Bowman's proposition that “troubled firms” prefer and seek risk. Unfortunately, two key constructs in prospect theory, reference point and risk attitude, have not been applied in risk-return research in ways consistent with prospect theory. The author examines a series of inconsistencies in the use of prospect theory in risk-return research to date and suggests remedies. A proposed approach using a longitudinal research design at the individual-firm level is applied in an empirical test of the Bowman hypothesis with data from brewing firms in the United States. The findings strongly support the Bowman hypothesis. |
