Factors Influencing Individual Investor Behavior: An Empirical study of the UAE Financial Markets

Transcription

1 Factors Influencing Individual Investor Behavior: An Empirical study of the UAE Financial Markets Hussein A. Hassan Al-Tamimi Associate Professor Department of Business Administration College of Business and Management University of Sharjah P.O.Box 27272,Sharjah United Arab Emirates IBRC Athens 2005 Copyright to Aryan Hellas Limited 1

2 Factors Influencing Individual Investor Behavior: An Empirical study of the UAE Financial Markets Abstract This paper aims at identifying factors influencing the UAE investor behavior. It develops a modified questionnaire. The questionnaire included thirty four items that belonge to five categories, namely, self-image/ firm-image co-incidence; accounting information; neutral information; advocate recommendations; and personal financial needs. Six factors were found to be the most influencing factors on the UAE investor behavior. The most influencing factor was in order of importance: expected corporate earnings, get rich quick, stock marketability, past performance of the firm s stock, government holdings and the creation of the organized financial markets. On the other hand, five factors were found to be the least influencing factors on the UAE investor behavior. The least influencing factors in order of importance were: expected losses in other local investments, minimizing risk, expected losses in international financial markets,, family member opinions, gut feeling on the economy. Two factors had unexpectedly least influence on the behavior of the UAE investors behavior, namely the religious beliefs and the factor of family member opinions. JEL Classification: G1;G11 Keywords: Behavioral Finance; Investor Behavior; Influencing Factors IBRC Athens 2005 Copyright to Aryan Hellas Limited 2

3 Factors Influencing Individual Investor Behavior: An Empirical study of the UAE Financial Markets 1.Introduction Research in behavioral finance is relatively new. Within behavioral finance it is assumed that information structure and the characteristics of market participants systematically influence individuals investment decisions as well as market outcomes. According to behavioral finance, investor market behavior derives from psychological principles of decision making, to explain why people buy or sell the stocks. Behavioral finance focuses upon how investors interpret and act on information to make investment decisions. In addition, the behavioral finance places an emphasis upon investor behavior leading to various market anomalies. Behavioral finance is defined by Shefrin(1999) as a rapidly growing area that deals with the influence of Psychology on the behavior of financial practitioners. Behavioral finance research is developing rapidly and now beginning to answer such questions as(see Taffler 2002): Why, when all the evidence shows investors cannot beat the market on any systematic basis, they still resolutely do? How can we explain the stock market bubbles? Why is the volume of trading in financial markets so excessive and why is the stock market so volatile? Why do investment analysts have so much difficulty in identifying under-and overvalued stocks? Why do stock prices appear to under-react to bad news? IBRC Athens 2005 Copyright to Aryan Hellas Limited 3

4 why are acquisitions on average turn to be unsuccessful? Why do corporate managers find it so difficult to terminate loss making projects? Why do most boards believe their companies are undervalued by the stock market? Why should new issues exhibit short-run stock market out-performance and then long-run under-performance? A better understanding of behavioral processes and outcomes is important for financial planners because an understanding of how investors generally respond to market movements should help investment advisors in devising appropriate asset allocation strategies for their clients. This study aims at exploring the UAE investor s behavior, representing the first attempt to be undertaken in the UAE. The study is important for individual investor, companies listed in Dubai Financial Market and Abu Dhabi Securities Market and Government. For investors as decision makers, the most influencing factor/ factors on their investment decision is crucial because this would affect their future financial plans. For companies, identifying the most influencing factors on their investors behavior would affect their future policies and strategies. Finally, for government, identifying the most influencing factors on investors behavior would affect the required legislations and the additional procedures needed in order to satisfy investors desires and also to give more support to market efficiency. Trading volume of Dubai Financial Market and Abu Dhabi Securities Market was highly fluctuated as Table 1, and Figures1 and 2, shown. Fluctuations in trading volume indicates somehow the abnormal behavior of the UAE investor, which needs to be investigated and this is the motivation behind the current study IBRC Athens 2005 Copyright to Aryan Hellas Limited 4

5 Table 1 Trading Volume of Duabi Financial Market and Abu Dhabi Securities Market During the Period Period Duabi Financial Market Abu Dhabi Securities Market 2003 January Febrauary March April May June July August September October November December 2004 January Febrauary March April May June July August September October November December 5,810,252 7,748,459 16,008,869 9,417,368 16,217,862 9,255,823 46,579,561 17,785,482 37,724,421 38,246,562 27,743,935 93,697, ,204,827 46,144, ,893, ,478, ,895, ,446, ,703, ,241, ,623, ,009, ,605, ,052,359 15,927,660 5,582,589 4,003,950 10,284,210 12,209,402 23,468,035 15,508,190 19,896,455 34,467,643 33,845,497 19,883,296 37,126,854 87,969,112 38,400,211 35,091,246 93,182,281 86,346,984 59,160, ,016,805 39,240,433 67,343,937 45,759,762 44,460, ,184,240 IBRC Athens 2005 Copyright to Aryan Hellas Limited 5

6 Figure 1 Trading Volume of Dubai Financial Market and Abu Dhabi Securities Market in No. of Stocks Abu Dhabi Securities Market Dubai Financial Market Months 1,400 Figure 2 Trading Volume of Dubai Financial Market and Abu Dhabi Securities Market in ,200 No. of Stocks 1, Abu Dhabi Securities Market Dubai Financial Market Months IBRC Athens 2005 Copyright to Aryan Hellas Limited 6

7 2.Literature Review In this paper a comprehensive literature review about behavioral finance in general is beyond the scope of the paper. Instead, the results of some empirical studies about individual investor behavior will be highlighted. It should be noted here that a substantial amount of attention has been given by researchers to the institutional investor behavior, whereas less attention has been given to the individual investor behavior which is the emphasis of this paper. However, almost all these studies have dealt with investor s behavior in industrialized countries (e.g. USA, UK, Canada). Kadiyala and Rau(2004) investigated investor reaction to corporate event announcements. They concluded that investors appear to under react to prior information as well as to information conveyed by the event, leading to the different patterns: return continuations and return reveals, both documented in long-horizon return. They found no support for the overreaction hypothesis. Merikas et.al.,(2003) adopted a modified questionnaire to analyze factors influencing Greek investor behavior on the Athens Stock Exchange. The results indicate that individuals base their stock purchase decisions on economic criteria combined with diverse other variables. They do not rely on a single integrated approach, but rather on many categories of factors. The results also revealed that there is a certain degree of correlation between the factors that behavioral finance theory and previous empirical evidence identify as the influencing factors for the average equity investor, and the individual behavior of active investors in the Athens Stock Exchange(ASE) influencing by the overall trends prevailing at the time of the survey in the ASE. IBRC Athens 2005 Copyright to Aryan Hellas Limited 7

8 Malmendier and Shanthikumar(2003) tried to answer the question: Are small investor naïve?. They found that large investors generate abnormal volumes of buyer-initiated trades after a positive recommendation only if the analyst is unaffiliated. Small traders exert abnormal buy pressure after all positive recommendations, including those of affiliated analysts. Hodge(2003) analyzed investors perceptions of earnings quality, auditor independence, and the usefulness of audited financial information. He concluded that lower perceptions of earnings quality are associated with greater reliance on a firm s audited financial statements and fundamental analysis of those statements when making investment decisions. Krishnan and Booker(2002) analyzed the factors influencing the decisions of investor who use analysts recommendations to arrive at a short-term decision to hold or to sell a stock. The results indicate that a strong form of the analyst summary recommendation report, i.e., one with additional information supporting the analysts position further, reduces the disposition error for gains and also reduces the disposition error for losses Nagy and Obenberger(1994) examined factors influencing investor behavior. They developed a questionnaire includes (34) questions. Their findings suggested that classical wealth maximimization criteria are important to investors, even though investors employ diverse criteria when choosing stocks. Contemporary concerns such as local or international operations, environmental track record and the firm s ethical posture appear to be given only cursory consideration. The recommendations of brokerage house, individual stock brokers, family members and co-workers go largely unheeded. Many IBRC Athens 2005 Copyright to Aryan Hellas Limited 8

9 individual investors discount the benefits of valuation models when evaluating stocks. Epstein(1994) examined the demand for social information by individual investors. The results indicate the usefulness of annual reports to corporate shareholders. The results also indicate a strong demand for information about product safety and quality, and about the company's environmental activities. Furthermore, a majority of the shareholders surveyed also want the company to report on corporate ethics, employee relations and community involvement. De Bondt et al.,(1985) published a paper about behavioral finance in which they asked the following question: Dos the stock market overreact?, the article gave evidence to support the hypothesis that cognitive bias ( investor overreaction to a long series of bad news could produce predictable mispricing of stocks traded on the NYSE. The main findings of the above studies can be summarized as follows: 1. There is no support for the overreaction hypothesis. 2. Investor over-reaction to a long series of bad news could produce predictable mispricing of stocks 3. Classical wealth maximimization criteria are important to investors. 4. The recommendations of brokerage house, individual stock brokers, family members and co-workers go largely unheeded 5. A strong demand for information about product safety and quality, and about the company's environmental activities 6. There exist a strong form of the analyst summary recommendation report, i.e., one with additional information supporting the analysts position further, IBRC Athens 2005 Copyright to Aryan Hellas Limited 9

10 reduces the disposition error for gains and also reduces the disposition error for losses 3. Research Methodology 3.1 Research Questions This study intends to answer the following questions: QUESTION 1: Does the factors related to self- image/firm-image co-incidence have an effect on the behavior of the UAE investor?, if so, what is the relative importance of the effect of each factor on such behavior? QUESTION 2: Does the factors related to accounting information have an effect on the behavior of the UAE investor?, if so, what is the relative importance of the effect of each factor on such behavior? QUESTION 3: Does the factors related to neutral information have an effect on the behavior of the UAE investor?, if so, what is the relative importance of the effect of each factor on such behavior? QUESTION 4: Does the factors related to advocate recommendations have an effect on the behavior of the UAE investor?, if so, what is the relative importance of the effect of each factor on such behavior? QUESTION 5: Does the factors related to personal financial needs have an effect on the behavior of the UAE investor?, if so, what is the relative importance of the effect of each factor on such behavior? IBRC Athens 2005 Copyright to Aryan Hellas Limited 10

11 3.2.The Questionnaire This paper developed a modified questionnaire to examin the behavior of the UAE investor. The questionnaire items represent five categories, namely selfimage/ firm-image coincidence; accounting information; neutral information; advocate recommendation; and personal financial needs. Based on this questionnaire, the most important item and the most important category will be identified. The developed questionnaire includes thirty four items where ten items correspond to self-image/ firm-image coincidence category, seven items correspond to accounting information category. Seven items correspond to neutral information category, four items to advocate recommendation and six items to personal financial needs. Respondents were asked to indicate their degree of agreement with each of the items on seven-point Likert scale. The current study considers two factors in which they are not considered before by previous published studies, namely the religious values beliefs and the creation of the organized financial markets( i.e. Dubai Financial Market and Abu Dhabi Securities Market). For the first factor, it is assumed that the religious reasons should have a strong effect on the behavior of the UAE investor because of the vital role of this factor in the UAE society as a Moslem and conservative society. It is also hypothesized that the creation of the two organized financial markets in this country, would have a positive effect on the behavior of the UAE investors.. IBRC Athens 2005 Copyright to Aryan Hellas Limited 11

12 3.3. Data Collection In order to get the answer on the research questions, 350 questionnaires were randomly distributed to 350 individual investors in both Dubai Financial Market and Abu Dhabi Securities Market. It is worth noting here that the number of investors who dealt with Abu Dhabi Securities Market was 66,772 investors and 154,041 investors of Dubai Financial Market at the end of Local investors constitutes a large proportion of total investors. For example at the end of 2004 this proportion was around 94% in Abu Dhabi Securities Market and 89.5% in Dubai Financial Market. The high proportion of local investors is mainly attributed to the current regulations in which foreign investors are not allowed to hold shares of certain local companies(i.e. the most popular and well known companies). The data provided were then examined, the screening process resulted in excluding seven(7) responses from the study because of missing data items. The remaining responses 343 represent an effective response rate of around 98 percent of the total sample. The number of usable responses received was 203 responses from Dubai Financial Market and 140 responses from Abu Dhabi Securities Market Reliability of the Measures Reliability of the measures was assessed with the use of Cronbach s alpha. Cronbach s alpha allows us to measure the reliability of the different categories. It consists of estimates of how much variation in scores of different variables is attributable to chance or random errors (Selltzm, et al., 1976). As a general rule a coefficient greater than or equal to 0.5 is considered acceptable and a good indication of construct reliability ( Nunnally,1976). The overall Cronbach s alpha for the five IBRC Athens 2005 Copyright to Aryan Hellas Limited 12

13 categories is (0.824). The Cronbach s alpha for the five categories, namely, selfimage/ firm-image coincidence, accounting information, neutral information, advocate recommendation and personal financial needs is (0.778), (0.790), (0.651), (0.610), (0.640) respectively. Cronbach s alpha show that these categories are reliable. 4. Results Table 2, provides the means and the standard deviations of the five groups of the factors influencing the UAE investors behavior. All the calculated means for the Table 2 Means and Standard Deviation of the Five Groups of the Factors Influencing the UAE Investors Behavior 1.Self-Image/Firm-Image Coincidence 1. Relegious reasons 2. Feelings for a firm s products and services 3. Reputation of the firm s shareholders 4. Get rich quick 5. Firm status in industry 6. The creation of the organized financial markets( i.e. Dubai Financial Market and Abu Dhabi Securities Markets) 7. Perceived ethics of firm 8. Gut feeling on the economy 9. Reputation of the firm 10.Increase of the firm s involvement in solving community problems Mean Std. Deviation Stock Marketability 12. Expected corporate earnings 13.Condition of financial statements 14. Dividends paid 15. Affordable share price 16. Expected Dividends 17. Past performance of the firm s stock 2.Accounting Information Mean IBRC Athens 2005 Copyright to Aryan Hellas Limited 13

14 Std. Deviation Neutral Information 18. Government holdings 19. Information obtained from the internet 20. Fluctuation/developments in the stock index 21. Coverage in the press 22. Statements from government officals 23. Current economic indicators 24. Recent price movement in a firm s stock Mean Std. Deviation Advocate Recommendation 25. Broker recommendation 26.Family member opinions 27. Friend or coworker recommendations 28. Opinions of the firm s majority stockholders Mean Std. Deviation Personal Financial Needs 29. Attractiveness of non-stock investment 30. Diversification needs 31. Ease of obtaining borrowed funds 32. Minmizing risk 33. Expected Losses in international financial markets 34. Expected Losses in other local investments Mean Std. Deviation.9703 five groups is greater than 4 out of the maximum answer, which is based on sevenpoints Likert scale. The calculated means indicate a positive answer for the first part of the five questions of this study. In other words all the 34 factors included in the questionnaire are somehow affecting the UAE investor decisions. The most important group was by order of importance: the neutral information, self-image/ firm-image coincidence, advocate recommendation, accounting information, and personal financial needs. However, the calculated means do not give an answer to the second part of the five questions, which is the most important part of this study, IBRC Athens 2005 Copyright to Aryan Hellas Limited 14

15 namely the relative importance of the effect of each factor on the behavior of the UAE investor. The effect of each factor of the 34 factors will be examined bellow: Table 3, shows the frequency distribution of variables that significantly influence the UAE investor behavior. A more complete picture however, is presented Table 3 Frequency Distribution of Variables that Significantly Influence the UAE Investor Behavior Item Frequency Percent 1. Expected corporate earnings % 2. Get rich quick % 3. Stock Marketability % 4. Past performance of the firm s stock % 5. Government holdings % 6. The creation of the organized financial markets( i.e. Dubai Financial Market& Abu Dhabi Securities Markets) % 7. Dividends paid % 8.Condition of financial statements % 9. Expected Dividends % 10. Current economic indicators % 11. Affordable share price % 12.Reputation of the firm % 13. Statements from government officals % 14. Recent price movement in a firm s stock % 15. Perceived ethics of firm % 16. Ease of obtaining borrowed funds % 17. Reputation of the firm s shareholders 93 27% 18. Firm status in industry % 19. Fluctuation/developments in the stock index 86 25% 20.Increase of the firm s involvement in solving community problems % 21. Relegious reasons % 22. Feelings for a firm s products and services % 23. Broker recommendations 24. Coverage in the press 25. Information obtained from the internet 26. Opinions of the firm s majority stockholders % % % % 27. Friend or coworker recommendations % 28. Attractiveness of non-stock investment % IBRC Athens 2005 Copyright to Aryan Hellas Limited 15

16 29. Diversification needs % 30. Gut feeling on the economy 31 9% 31.Family member opinions % 32. Expected losses in international financial markets % 33. Minmizing risk 24 7% 34. Expected losses in other local investments % in Table 4, which shows the same data sorted according to those factors that have the least influence on the UAE investor behavior. It can be seen from Table 4 that most of the variables that were rated important are classical wealth maximization criteria such as; the expected corporate earnings, and get rich quick. This is consistent with Merikas et. al.,(2003) findings. Under the wealth maximization criteria, four factor, were also significantly affecting the UAE investor behavior, namely past performance of the firm s stock, dividends paid, condition of financial statements, and expected dividends, these factors were ranked 4,7, 8, and 9 respectively. Other factors were also significantly affected the UAE investors behavior, for example the UAE investors are more interested in stock marketability. This would affect the policies that to be followed by companies listed in the two financial markets. For example, in order to increase their stock marketability, they need to review frequently, the relationship between the price and demand on their stocks. If the stock price is too high, this might make it difficult to sell, and one of the policies can be adopted by companies to make it more marketable is a stock split. Government holdings is also a significant factor of the UAE investor behavior, where more than 50% of total respondents consider this factor, the most influencing factor on their investment decision. It should be mentioned here that there are a large number of shares of listed companies which are being held by the UAE government. Finally, another factor which was sugested by respondents as the most IBRC Athens 2005 Copyright to Aryan Hellas Limited 16

17 influencing factor on the UAE investor behavior, is the creation of the organized financial markets( i.e. Dubai Financial Market and Abu Dhabi Securities Markets). Around 51% of total respondents indicated that this factor was the most influencing factor on their investment decision, which reflects the vital role of the Table 4 Frequency Distribution of Variables that Least Influence the UAE Investor Behavior Item Frequency Percent 1. Expected losses in other local investments % 2.Family member opinions % 3. Friend or coworker recommendations % 4. Information obtained from the internet % 5. Opinions of the firm s majority stockholders % 6. Attractiveness of non-stock investment % 7. Ease of obtaining borrowed funds % 8. Relegious reasons % % 9. Expected losses in international financial markets 10.Increase of the firm s involvement in solving community problems % 11. Minmizing risk % 12. Gut feeling on the economy % 13. Broker recommendations % 14. Diversification needs % 15. Affordable share price % 16. Coverage in the press % 17. Expected Dividends % 18. Statements from government officals % 19. Government holdings % % 20. The creation of the organized financial markets( i.e. Dubai Financial Market& Abu Dhabi Securities Markets) 21. Perceived ethics of firm % 22. Current economic indicators % 23. Reputation of the firm s shareholders % 24. Firm status in industry % 25. Stock Marketability % 26. Recent price movement in a firm s stock 3 0.9% 27. Feelings for a firm s products and services 3 0.9% 28. Past performance of the firm s stock % 29. Fluctuation/developments in the stock index % 30. Get rich quick % 31. Reputation of the firm % IBRC Athens 2005 Copyright to Aryan Hellas Limited 17

18 32. Expected corporate earnings % 33.Condition of financial statements % 34. Dividends paid % two financial markets. It should be mentioned here that, the UAE investors were not familiar with the organized financial markets five years ago, in which both of the two financial markets were established in Some factors had unexpectedly least influence on the behavior of the UAE investor behavior. For example, in the case of the religious reasons, only 80 respondents or 23% of total response consider this factor as the most influencing factor on the UAE investors do not behavior. For the UAE society as a Moslem society, and as it was mentioned before the religious reasons factor was expected to be considered by a large number of respondents as the most influencing factor on their investment decision. This is mainly because most the UAE investors don t like to invest their money in the conventional banks in order to avoid adding interest on their investment which is forbidden from an Islamic point of view. The other unexpected responses were those related to family member opinions, in which only 29 respondents or about 8% of total responses consider this factor as the most influencing factor on the UAE investor behavior. The least influencing factors on the behavior of the UAE investor were clearly presented in Table 4. It is iterested to note that almost the same factors listed on the top of Table 3, became on the bottom of Table 4. Regarding the five groups of factors influencing the UAE investor behavior, the most influencing factors were found belong accounting information group, namely expected corporate earnings, stock marketability, past performance of the firm s stock, dividends paid, condition of financial statements and expected IBRC Athens 2005 Copyright to Aryan Hellas Limited 18

19 dividends. Clearly for companies listed in Dubai Financial Market& Abu Dhabi Securities Markets, require to give more attention to these factors in order to satisfy the desires of their investors and also to attract more investors to deal with their stocks. The second group was self-image/ firm-image coincidence group in which there were three factors influence the UAE investor behavior, namely get rich quick, reputation of the firm and perceived ethics of firm. The third group was neutral information, followed by advocate recommendation and the last group was personal financial needs. 5. Summary and Conclusions In this paper factors influencing the UAE investor behavior on Dubai Financial Market and Abu Dhabi Securities Market were examined. The paper develops a modified questionnaire. The questionnaire included thirty four items that belonge to five categories, namely self-image/ firm-image coincidence; accounting information; neutral information; advocate recommendation; and personal financial needs. Six factors were found the most influencing factors, where more than 50% of total respondents consider these factors as the most affecting factors on their behavior. The most influencing factor was by order of importance: expected corporate earnings, get rich quick, stock marketability, past performance of the firm s stock, government holdings, the creation of the organized financial market( i.e. Dubai Financial Market& Abu Dhabi Securities Markets). Five factors were found the least influencing factors, where less than 10% of total respondents consider these factors as the least affecting factors on their behavior. The least influencing factor was by order of importance: expected losses in other local investments, IBRC Athens 2005 Copyright to Aryan Hellas Limited 19

20 minimizing risk, expected losses in international financial markets,, family member opinions and gut feeling on the economy. The most influencing group was by order of importance accounting information, self-image/ firm-image coincidence, neutral information, advocate recommendation, and personal financial needs. Two factors had unexpectedly least influence on the behavior of the UAE investor behavior, namely the religious reasons and the factor of family member opinions. Acknowledgment I would like to thank University of Sharjah for the research grant. References: Bernstein,J.(1993). The Investors Quotient, John Wiley &Sons. De Bondt,W.F. and Richard,T.(1985). Does the stock market overreact?, Journal of Finance 40, Epstein,M.J.(1994).Social disclosure and the individual investor, Accounting, Auditing &Accountability Journal,4, Hodge,F.D.(2003), Investors perceptions of earnings quality, auditor independence, and the usefulness of audited financial information, Accounting Horizons, 17, Iyer,S.B. and Bhaskar,R.K.(2002). Investor s psychology: a study of investor behavior in the IndianCapital Market, Finance India,XVI,4, Kadiyala,P. and Rau,R.(2004). Investor reaction to corporate event announcement: Underreaction or overraction?, Journal of Business,77,2, Krishnan,R.and Booker,D.M.(2002). Investors use of Analysts recommendations, Behavioral Research in Accounting, 14, Merilkas,A., Merilkas,A.,and Prasad,D.(2003). Factors influencing Greek investor behavior on the Athens stock exchange, Paper presented at the Annual Meeting of the Academy of Financial Services, Denver, Colorado, October Nagy,R.A.and Obenberger,R.W.(1994). Factors influencing investor behavior, Financial Analysts Journal,50,40, Nunally, C.J. (1978). Psychometric Theory, New York, McGraw-Hill. Selltiz,C.,Wrightsman,L.S.and Cook,W.(1976), Research Methods in Social Relations, Holt,Rinehart and Winston,New York Shanthikumar,D. and Malmendier,U.(2003). Are small investors naive?, Stanford University Working Paper. Shleifer, A.(1999).Inefficient Markets: An Introduction to Behavioral Finance. Oxford University Press. Taffler,R.J.(2002). What can we learn from behavioral finance?, Credit Control,23,2. IBRC Athens 2005 Copyright to Aryan Hellas Limited 20

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