Behavioral implications of risk-return associations: An application of prospect theory on CNX NIFTY companies

Abstract

This study primarily investigates the risk attitudes of the fifty CNX NIFTY companies from a behavioral perspective as proposed by Kahneman and Tversky (1979) and Tversky and Kahneman (1992). It hypothesizes that for below target returns, a large majority of Indian companies would be risk-seeking, and for above target returns, most of them would be riskaverse. To fulfil its objectives, this study uses rates of return on assets and equity and the capital ratios of fifty CNX NIFTY companies over the period 2009-2013. It also uses Kendall’s (1938) test to measure the correlations between above variables within the relevant groups (all companies and each sub group [under Size and Industry]). Results show that bigger and smaller Indian companies and their managers are mostly risk-seeking and risk-averse respectively and shareholders-centric in regard to their attitude. These results will have important implications for the Indian companies and managers in evaluating their risk attitudes from the behavioral perspective.