기업수익성과 경영자의 경영위험 선택

This study explores prospect theoretic explanation of the relationship between risk and return for firms. Kahneman and Tversky(1979) proposed prospect theory as an alternative theory of decision-making behavior under risk. They suggests that risk preferences are domain-specific; that is, latent risk preferences translate into differing manifest risk preferences according to the context, namely gains or losses. The purpose of this study is to examine whether such an asymmetric attitude toward risk also applies to managerial decision making processes in Korea and to extend the existing literature by providing theoretic explanation of differential degrees of association depending on firm’s return status around target level. Previous studies in the risk return relationship have documented negative association below target and positive association above. The latent literature attributes the compartmentalization of the risk and return relationship to the reflection effect, but it neglects to explain the differential degrees of association. The reflection effect refers to the tendency to reverse risk preferences around a reference point, which is, risk seeking for losses and risk aversion for gains. Loss aversion based on the prospect theory’s asymmetric value function is one of the most important implications of the theory. Loss aversion posits that managers have the tendency to seek risk when faced with possible losses, and to avoid risk when a certain gain is possible. Such an asymmetric value function around a reference point induces weaker associations above target return than below target return.