Risk-seeking by troubled firms: JSE listed firms

Abstract

This study examines the risk-seeking behaviour of troubled firms using a sample of Johannesburg Stock Exchange (JSE) listed firms over the period 1995-2018. A firm’s riskiness is determined by the absolute distance of its return on equity (ROE) from its industry median ROE. Thus, a firm’s performance is defined relative to its peers. This study reports a statistically significant negative relationship between the firm’s performance and its subsequent risk. When compared to prior gains, prior losses are followed by more risk-seeking activities. The findings are consistent with prospect theory. Firms take more risk when troubled, indicating that current performance of a firm determines its future risk level. Moreover, these associations are much stronger for firms which remain in the same states for longer periods