Risk Attitudes of the Listed Indian Financial Companies: A Prospect Theory Perspective

Abstract

The objective of this research study is to analyze the risk-attitudesof the listed Indian financial companies from a behaviouralperspective. For the purpose, it examines the implications ofKahneman and Tversky’s (1979) and Tversky and Kahneman’s(1992) ‘prospect theory’ for these companies. This study hypothesizes
that for below-target returns, a large majority of themwould be risk seeking, and for above-target returns, most of thesecompanies would be risk averse. In this respect, this paper usesrates of return on assets and equity and the capital ratios of 34Indian commercial banks and 21 investment & finance companies
from the Indian stock markets over the period 2009-2013.On an overall basis, the Indian financial companies don’t showany overwhelming presence of the prospect-theory implicationsand Bowman’s (1980) risk-return paradox. However, it is evidentfrom the empirical results that mostly bigger and some
smaller financial companies and their managers are always riskseeking and mostly shareholders-centric in regard to their attitude.Keywords: Risk-return, Prospect theory, Indian banks,ROA, ROE, Capital ratio.