Impacting factors on Individual Investors Behaviour towards Commodity Market in India

Transcription

1 Impacting factors on Individual Investors Behaviour towards Commodity Market in India A Elankumaran, Assistant Professor, Department of Business Administration, Annamalai University & A.A Ananth, Associate Professor, Department of Business Administration, Annamalai University Abstract Under the concept of behavioral finance, it is presumed that information structure and characteristics of capital market participants systematically influence their own decisions as well as market outcomes. As the investor s investment decisions in any one particular market tend to rely more on their behaviour derived from psychological principles of decision making, a better understanding of behavioural processes and outcomes is important for financial planners. Further, identifying the factors that play an important role in determining the behaviour of investors would affect the future policies and strategies of the financial planners and market brokers as well as the government. Hence, the present article is focused on exploring the factors influencing the behavior of investors towards commodity market in India. This study, based on primary data, adopted survey approach to measure the investors behavior. The sample respondents are individual / retail investors selected randomly in Trichy district. Questionnaire comprising a scale with 15 items for measuring the behavior were distributed and the total number of respondents was 525. Cronbach alpha method was applied to check reliability and validity of the collected data. The main components underlying the scale that have greater influence on the investors behavior were ascertained by multivariate analysis called Principal component method of Factor analysis with varimax rotation. The descriptive analysis was also used to explore the degree of influence of main components on the behavior of investors. The results of analysis exposed four major factors that have greater influence on the behavior of investors, viz., low risk, informational asymmetry, high return and objective knowledge. Key Words: Behavioural finance, Measurement scale, Cronbach alpha coefficient, Principal Component Method of Factor Analysis with varimax rotation and Confidence interval. Introduction Behavioural finance has emerged as a new concept in the research area in recent times. Within this framework many countries in the world take effective steps to develop the capital market to achieve good economic growth. Under this concept, it is presumed that information structure and characteristics of capital market participants (individual / retail investors) systematically influence their own decisions as well as market outcomes. For example, in country like India, the information content of the market and the change of economic climate systematically influence individuals investment decisions as well as market outcomes. However, an investor s investment decisions in any one particular market, say for example commodity market, tend to rely highly on their behaviour derived from psychological principles of decision making as only this psychological principle of decision making can explain why people buy or sell particular commodity. Therefore a better understanding of behavioural processes and outcomes is important for financial planners, because an understanding of how investors generally respond to market movements will help investment advisors in devising appropriate asset allocation strategies for their clients. Hence, the present article focuses on exploring the factors influencing the behavior of investors towards commodity market in India. > RJSSM: Volume: 02, Number: 12, April-2013 Page 147

2 Investor Behaviour The investment behaviour of individual investors is somewhat different from that of institutional investors. Individuals tend to invest relatively more in non-tradable assets such as real estate, hedge funds, or structured products. The term institutional investor is generally used to describe an organization that invests on behalf of others, such as a mutual fund, pension fund, or charitable organization. According to Gerald Appel (2006), investor behaviour is one that an investor displays in searching for purchasing, using, evaluating, and disposing of goods, services, ideas, or experience to satisfy their needs and desires. The investor behaviour is mainly influenced by environmental factors. Though these factors are uncontrollable by the markets, they are very important in determining the behavior of an investor. So, investor behaviour means that investors change their attitudes by buying and selling the shares / commodities under different environment. Review of Literature Many recent studies in applied finance argue that individual investor behaviour is often affected by a variety of psychological heuristics and biases. According to Barber and Odean (2005) [1], the sentiment of individual and retail investors does affect stock prices, as their trading is systematically correlated. Baker, Haargrove and Haslem (1977) [2] went a step further by proposing that investors behave rationally, taking into account the investment s risk/return tradeoff. Many researchers have attempted to address the behavioural issues in capital market by their own ways. The supporters of behavioural finance are trying to explain them through certain behavioural and psychological factors. Though exploring the aspects of investor behaviour is widely applied, assessing individual investment behaviour thorough questionnaire survey is also a well adopted approach in behavioural finance research. Nagy and Obenberger (1994) [3] developed a questionnaire that included 34 factors influencing individual investors behaviour such as expected corporate earnings, diversification needs, feelings for firm s products and services, past performance of stocks, past performance of their own portfolio and stock broker recommendations to name a few. Merikas and Prasad (2003) [4] have adopted a modified questionnaire to analyze factors influencing Greek investor behaviour on the Athens Stock Exchange (ASE). According to their findings, individuals base their purchase decisions on economic criteria combined with other diverse variables. According to Kent and Siew (2001) [5], the most common behaviour that most investors do when making investment decision are: not participating in all asset and security categories; exhibiting loss-averse behavior; using past performance as an indicator of future performance in purchase decisions; trading too aggressively; behaving on status quo; not always forming efficient portfolios; behaving parallel to each other; and getting influenced by historical high or low trading stocks. Hussein (2006) [6] made an attempt to identify the factors influencing the UAE investor behavior on the Dubai Financial Market and Abu Dhabi Securities Market. He constructed a questionnaire which included thirty-four items that belong to five categories (self-image / firm-image coincidence, accounting information, neutral information, advocate recommendation and personal financial needs). He identified six most influencing factors by order of importance, viz., expected corporate earnings, get rich quick, stock marketability, past performance of the firm s stock, government holdings, the creation of the organized financial markets ; and five least influencing factors such as, expected losses in other local investments, minimizing risk, expected losses in international financial markets, family member opinions and gut feeling on the economy. Henrik and Stephan (2009) [7] stated that the cross-sectional heterogeneity is the key measure of investment behavior into genetic and environmental influences. They found that up to 45 percent of the variation in stock market participation, asset allocation, and portfolio risk choices are explained by a genetic component. > RJSSM: Volume: 02, Number: 12, April-2013 Page 148

3 Statement of the Problem The rise of commodity market in India affects its economic growth and development. As growth of commodity market is vital factor for our country s economic growth and trend in this market is defined by the decisions of investors, it is important to explore behaviour factors influencing the decision of individual / retail investors. Further, an understanding of investors behaviour and outcomes through behaviour process in the form investment decision is much important for financial planners and market brokers, because it would help them devise appropriate asset allocation strategies to their clients. Also, identifying the factors that play an important role in determining the behaviour of investors would affect the future policies and strategies of the financial planners and market brokers as well as the government. Though there are many studies available exploring the behavior of investors towards equity markets, similar studies on commodity market are scanty. So, the present research work is undertaken in this direction. Significance of the Study The study, which attempts to identify the major factors contributing to the investor behavior in commodity market, could help the present and future investors to change their behavior towards this market. The financial planners and market brokers will also get to know pulse of the investors. Hence, the study like this one is of much significance not only for present / future investors, but also for financial planners and market brokers. Objectives Methodology The present research work is carried out with following objectives: 1) To identify the major factors that have greater influence on the behavior of commodity market investors. 2) To evaluate the investors perception about extent of influence of each major factor on behavior of investors towards commodity market. The present research on factors determining the behavior of commodity market investors adopted survey approach for collecting the data from target population comprising individual / retail investors in Trichy district. The questionnaire instrument was used to collect data. In the questionnaire, a scale comprising 15 items with 5-point scale ranging from strongly disagree, disagree, neither disagree nor agree, agree and strongly agree was included to obtain the opinion of the respondents. For the purpose of analysis, the qualitative values from strongly disagree to strongly agree are converted into qualitative value from 1 to 5 respectively. The questionnaire was distributed among 550 randomly selected individual / retail investors and only 535 responses were received. Out of 535 questionnaires received, 10 questionnaires were found to be incomplete in some way or other, and so dropped. Therefore, finally 525 responses were used for the analysis. The response rate was stood at per cent. The high response rate is due to the fact that most of the questionnaires were completed on one-on-one basis. As the present research work is aimed at examining certain behavioural factors that seem to exercise greater influence on individual commodity market investors, multivariate analysis was attempted on the data. The multivariate analysis is used here to combine all psychological attitudes considered in the questionnaire (all 15 items measuring the behavior of commodity market investors) in order to reduce them into a few main behavioural constructs that will describe the behaviour of the Indian individual commodity investors. Each construct would regroup all the correlated factors, such > RJSSM: Volume: 02, Number: 12, April-2013 Page 149

4 that the main construct resorted would be independent and sufficient to explain the biggest portion of data variance. To achieve the multivariate analysis, the study uses the principal component method of factor analysis with varimax rotation. The principal component method of factor analysis allows searching for underlying dimensions in the various sets of variables considered in the questionnaire and lets us determine which factors or underlying variables have the greatest impact on the subjects. The choice of this method was based on its utmost suitability for such studies, as suggested by Kolenikov and Angeles (2009) [8], and Zoghalami and Matoussi (2009) [9]. Before using factor analysis, the reliability and validity of the data were ascertained by Cronbach alpha coefficient. The Cronbach alpha coefficient was found to be for all 15 items in the scale, indicating good level of reliability and validity. After ascertaining the main factors that have greater influence on the sbehaviour of investors towards commodity market, the scores for each factor is calculated by averaging the scores of items with high loadings with that factor. This is undertaken to know what extent the each factor has influence on the investors behavior. Results and Discussion From the perusal of the Table I, it is evident that the first four factors out of 15 possible factors are found with eigenvalue more than one and together explaining percent of the variance in the original data. The amount of total variance explained individually by first, second, third and fourth factor is per cent, per cent, per cent and 7.63 per cent before maximization (using varimax rotation) respectively. So, these four factors are found to be the main factors that have greater influence on the behavior of commodity market investors. From the observation of factor loadings of scale items with four factors as shown in Table II, it is understood that the first factor characterizes the low risk as items 7 (Risk is minimum compared to that of equity market), 10 (Commodity market is less volatile than equity market), 9 (Commodity market is less speculative than equity market), 15 (Volatility is less compared to that of equity market) and 11 (Losses are limited), which measures the risk in the market, are highly loaded with this factor relative to other remaining three factors. The second factor, with high loading of item 12 (Rising trend in worldwide demand of many commodities) and 5 (Coverage in the media) followed by 6 (Statements from market experts) and 8 (Growing presence of financial investors in commodity market), is labeled as informational asymmetry. The third factor component, which posseses most of the essence of item 13 (Low brokerage fee), 4 (Initial investment is very less) and 14 (Returns from investments in commodity market is more than that of financial (equity market) compared to that of those items with any other remaining factors, factors is named as High return from low investment. The fourth and final factor is highly correlating with item 3 (Earnings are more than that of equity market), 1 (Get rich quickly) and 2 (Gut feeling of the economy). That is, the fourth factor posseses most of the characteristics of the items that are associated with objective knowledge of the investors. Therefore, this factor is identified as objective knowledge. An extent of determining power of these four factors on behavior of investors is explored by descriptive analysis of the factor scores (obtained by averaging the scores of highly items). As presented in Table III, the mean values, 3.64 for low risk, 3.79 for information asymmetry, 3.77 for high return and 3.78 for objective knowledge are all in agree range (>= 3.50 and < 4.50). Moreover, the lower and upper bound values in 95 per cent confidence intervals lie within agree range. Hence, it can be said with 95 per cent confidence that the behaviour of commodity market investors is significantly determined by low risk, informational asymmetry, high return and objective knowledge. From the comparison of mean values, it is further understood that the degree of influence of information asymmetry, objective knowledge and high return on the behavior of investors towards commodity market is little higher than that of low risk. > RJSSM: Volume: 02, Number: 12, April-2013 Page 150

5 Conclusion The inferences of the results of the factor analysis and descriptive statistics have led to the conclusion that there are multiple factors that have greater influence on the behavior of commodity market investors in India. The main factors that have such greater influence are: information asymmetry, objective knowledge, high return and low risk. The extent of influence of all these four factors on the commodity market investors behavior is found to be significant with 95 per cent confidence level. References: [1] Barber, Brda M., and Terrance Odean. (2005). All the glitters: The effect of attention and news on the buying behaviour of individual and institutional investors. Working Paper. University of California, Davis. [2] Baker, H.K., M.B. Hargrove, and J.A. Haslem, (1977) An Empirical Analysis of the Risk Return Preferences of Individual Investors, Journal of Financial and Quantitative Analysis, 12(3): [3] Nagy, R. A. and R. W. Obenberger. (1994). Factors influencing investors behaviour. Financial Analyst Journal, 50: [4] Merikas, A. and D. Prasad. (2003). Factors influencing Greek investor behaviour on the Athens Stock Exchange. Paper presented at the Annual Meeting of the Academy of Financial Services, Denver (Colorado, USA). [5] Kent D., Hirshleifer., and Siew Hong Teoh. (2001). Investor psychology in capital markets: evidence and policy implications, Journal of Monetary Economics, 49(1), [6] Al-Tamimi, Hussein A Hassan. (2006). Factors Influencing Individual Investor Behaviour: An Empirical Study of the UAE Financial Markets. The Business Review, Campbridge, 5 (2): [7] Barnea,A., Henrik, C., and Stephan, S. (2009), Nature or Nurture :What Determines Investor Behavior? Study of economics and finance, Ethics Review Board for the stock Holm Region, pp [8] Kolenikov, Stanislav, and Gustavo Angeles. (2009). Socioeconomic status measurement with discrete proxy variables: Is principal component analysis a reliable answer? Review of Income and Wealth, 55 (1): [9] Zoghalami, Faten, and Hamadi Matoussi A survey of Tunisian investors. International Research Journal of Finance and Economics, 31: > RJSSM: Volume: 02, Number: 12, April-2013 Page 151

6 Low Risk Informational Asymmetry High Return Objective knowledge Item No Annexure Table I: Eigenvalues of Factors Underlying the Items Measuring the Influential Factors for Investors Behaviour Factors Eigenvalue % of Total Variance Cumulative % of Total Variance Source: Primary Data Table II: Items Loading with Valid Factors Influencing the Behaviour of Commodity Market Investors Description of Scale Items Factor Risk is minimum compared to that of equity market Commodity market is less volatile than equity market Commodity market is less speculative than equity market Volatility is less compared to that of equity market Losses are limited Rising trend in worldwide demand of many commodities Coverage in the media Statements from market experts Growing presence of financial investors in commodity market 13 Low brokerage fee Initial investment is very less Returns from investments in commodity market is more than that of financial (equity) market 3 Earnings are more than that of equity market Get rich quickly Gut feeling of the economy Explained Variance % of Total Variance Cumulative % of Total Variance Factor Label Source: Primary Data > RJSSM: Volume: 02, Number: 12, April-2013 Page 152

7 Table III: Extend of Determination of Factors on Behaviour of Investors - Perception of Entire Sample Major Factors Determining the Standard 95% CI Mean Behaviour Deviation Lower Upper Low Risk Informational Asymmetry High Return Objective knowledge Source: Primary Data. CI Confidence Interval > RJSSM: Volume: 02, Number: 12, April-2013 Page 153