Prospect theory: Overcome risk disaster in emerging market

Abstract

This paper investigates specific risk in emerging market. Emerging markets are accumulating capital at a faster rate than developed markets but they lag far behind developed markets. Risk is one of the main factors that investors consider when making investments. Risk contained in Financial Accounting come from accrual accounting method. Accrual measurements in the Balance Sheet are measured using persistence current operating accrual, persistence non-current operating accrual, financial persistence accrual, and accrual anomaly. Accruals in the income statement are measured using the accrual anomaly modified Jones model. Accrual measurements are used as information used by investors in predicting risk specifically. The idiosyncratic risk reflects the specific information about the company, and it will fluctuate according to the information itself. We find that the financial risk documented in this study is associated with the risk faced by the investor. Prospect Theory can be used to predict and explain behavior decision making to overcome disaster risk faced by an investor in the future.