Testing Bowman's paradox in the Indonesian stock market: does Islamic labelling matter?

PurposeThis study aims to delve into Bowman's paradox, challenging the established "higher risk, higher return" theory in an emerging economy, Indonesia. Also, it investigates how firm-specific attributes, including the designation of Sharia-compliant equities, impact and differentiate risk-return profiles.Design/methodology/approachThis study examines Bowman's paradox in the Indonesia Stock Exchange (IDX), assessing whether Islamic labelling offers additional insights. The study analyses 2,966 firm-year observations from 2014 to 2022 using panel regression models (random and fixed effects) as baseline regressions, supplemented by system generalized method of moment and method of moments quantile regression to test the robustness of the findings.FindingsThe authors confirm the paradox, particularly when firms underperform, with additional risk diminishing profitability. This paradox is less prominent in Islamic-labelled firms, where Sharia-compliant screening deters excessive risk-taking. The baseline results are consistent with robustness tests. This work contributes significantly to Islamic finance theory and underscores the importance for practitioners and policymakers to integrate Islamic values to curb excessive risk-taking.Research limitations/implicationsThis work contributes significantly to Islamic finance theory and underscores the importance for practitioners and policymakers to integrate Islamic values to curb excessive risk-taking.Originality/valueThis research is a pioneering empirical work that investigates the urgency of a Sharia-compliant screening mechanism in shaping the risk-return nexus.