Risk-Return Association for Italian Non-Financial Firms from a Prospect Theory Perspective

Abstract

Risk-return association is one of the major concerns for economics and business disciplines. While the standard economics and finance theory assume that the sign of the relationship should be positive (individuals are assumed to be risk adverse), since Bowman (1980) many researchers have found negative or shifting relationship.This study analyses the risk-return association for Italian non-financial firms over the period 2000-2007 and the two sub-periods 2000-2003 and 2004-2007 from the Prospect Theory perspective. The analysis is performed on accounting data. Results show that firms with return above their reference point (industry median return) are risk adverse and those with return below their reference point are risk seeking, as predicted by the Prospect Theory. The hypothesised steepness of the association for below-reference-point firms finds ambiguous evidence.