Risks are normally measured by earnings volatility (e.g. standard deviations and Betas), whereas returns can be measured by historical earnings (e.g. dividends and capital appreciation). If, on average, investors can reasonably measure a company’s risks and returns, and subsequently make their investment decisions, they are called rational investors. Accordingly, a rational, risk-averse investor requires an increase in the expected future returns from any more risky investment in order to compensate for any potential volatility. Nevertheless, the present study adopts the subjective measures of risks and returns rather than their traditional objective measures (e.g. betas and capital appreciation). In making investment decisions, these subjective measures of risks and returns are commonly used by novice investors who own relatively small investment portfolios as compared to professional investors. Furthermore, the behavioural finance literature suggests that the relationship between perceived risks and perceived returns is inverse rather than positive.
The risks of a company can also be spread via word of mouth. Peers and family are also known to be the main information sources for investors. The effects of word of mouth are stronger in the event that those who spread such information have had real experience investing in a particular company, both positive and negative. For example, an investor who has had a positive experience investing in a particular company due to consistent capital appreciation and reasonable dividend payments is likely to recommend, or at least talk positively, about that company to friends and family. When combined with positive professional reports by financial analysts or even good ‘testimonials’ from online social groups, investors will then form a positive attitude towards that company’s image. Therefore hypotheses related to RISK is stated as:
H2a: ‘perceived risk’ is negatively related to ‘attitude towards brand’
H2b: ‘perceived risk’ is negatively related to ‘perceived returns’
Mayer, Davis and Schoorman define trust as ‘the willingness of a party to be vulnerable to the actions of another party’. In this situation, shareholders as the owners of a company put their trust into the management team who are appointed to run the company. When the interest of agent (the appointed management) differs from that of principals (shareholders), agency problems tend to occur which leads shareholders to assume some agency cost such as remunerating highly performing managers with special incentives and appointing board of directors to oversee the conduct of management. Siegrist and Cvetkovich assert that cognitive trust which is related to perceived competence and reliability normally given greater weight than affective trust, when a particular hazard (e.g. financial loss) being evaluated is familiar to the trustor (e.g. investors). Affective trust is demonstrated when the trusted party (i.e. management and directors) is believed to have demonstrated fairness, compassion and integrity. When investors have determined that a company has had satisfactory returns in the past, they will likely perceive that this trend will hold in the future. Therefore, hypotheses tested on the trust variable are as follows:
H3a: ‘perceived trust’ is positively related to ‘attitude towards brand’
H3b: ‘perceived trust’ is negatively related to ‘perceived risk’
H3c: ‘perceived trust’ is positively related to ‘perceived returns’
As discussed earlier, returns are commonly measured by dividend payout and capital appreciation. It is also common that investors tend to perceive historical returns to hold in the foreseeable future. Hence, they evaluate financial performance of the past several years and make some anticipation of the likelihood of the company’s returns in the future. Since, individual investors are generally lack of ability to properly evaluate such returns, their perceptions of company’s returns may play a greater role, or at least their evaluations assist them to form such perceptions. Therefore, the hypothesis of perceived returns is stated as:
H4: ‘perceived returns’ is positively related to ‘attitude towards brand’