What is risk aversion? If common stockholders are risk averse, how do you explain the fact that they often invest in very risky companies?

Risk aversion is the trend to avoid additional risk. Risk-averse people will prevent risk if they can, if not they receive additional compensation for assuming that risk.  In finance, the added compensation is a higher expected rate of return.

People are not all are equally risk averse. For instance, some people are willing to buy risky stocks, whereas others are not.  The ones that do, though, almost all time demand an suitably high expected rate of return for taking on the additional risk.