Abstract
Prospect theory implicates that risk aversion of companies in gain domain is equal to risk seeking in their attitude when facing situation of loss. Behavior of companies in gain domain should be the mirror image of their behavior in the loss domain which phenomenon is known as “reflection effect”. The value function of Cumulative Prospect Theory has been used as basic empirical model in this study. Capital investment of firms is taken as dependent variable and financial performance of firms which is explained through return on equity (ROE) has been taken as independent variable. Risk averse behavior of firms in making their capital investment decision is evaluated through value function in the gain domain and risk seeking behavior of firms in making their capital investment decision has been investigated through value function in the loss domain. Rationale for using capital investment as dependent variable is that investment decision of a firm is greatly influenced and depends upon its financial performance. This utility from financial performance was represented through change in capital investment ratio, while financial performance represented gain or loss relative to a reference point. Results have indicated that companies are not all the time risk averse even being in gain domain and likewise, they are not found risk seeking in their behavior in loss domain exactly for all the years in which they are found risk averse in their attitude.