International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), INTERNATIONAL JOURNAL OF MANAGEMENT (IJM) Volume

e 5, Issue 1, January (2014), IAEME

ISSN 0976-6502 (Print) ISSN 0976-6510 (Online) Volume 5, Issue 1, January (2014), pp. 07-13 IAEME: www.iaeme.com/ijm.asp Journal Impact Factor (2013): 6.9071 (Calculated by GISI) www.jifactor.com

IJM
IAEME

A STUDY ON FACTORS INFLUENCING INVESTOR SENTIMENT IN INDIAN STOCK MARKET

SINDHU .K.P., Dr. KALIDAS .M.G., ANIL CHANDRAN. S
1, 2, 3

Assistant Professor, Post Graduate Department of Commerce and Management Studies Nss College, Nemmara, Nss College P.O., Palakkad-678508, Kerala

ABSTRACT Behavioral finance is a branch of finance that studies how the behavior of agents in the financial market and influenced by psychological factors and the resulting influence on decisions made while buying or selling the market, thus affecting the prices. The science aims to explain the reasons why its reasonable to believe that markets are inefficient. In order to explain the various irrational investor behaviors in financial markets, behavioral economists draw on the knowledge of human cognitive behavioral theories from psychology, sociology and anthropology. Investor sentiment is the attitude and opinion of investors towards investing in different type of securities. There are various factors affecting investor sentiments. The present paper tries to analyse the various factors influencing investor sentiments in the Indian stock market. The analysis of the data revealed that there exists significant relationship between gender of the investors and the factors like herd behavior, risk factors, confidence and performance factors etc. Key Words: Investor Sentiment, Herd Behavior, Risk Factors, Confidence Factors. 1. INTRODUCTION Decision- making is a complex activity. It is a serious mental activity which must take into consideration the all aspects of the situation. The complexities of this activity become much higher for an investor. Because this need better insight and understanding of human nature in the existing global perspective, plus development of fine skills and ability to get best out of investments. Investment decision is the most crucial challenge faced by an investor. Every investor is unique in all aspects due to various demographic factors like gender, age marital status, socio-economic background, educational level, occupation etc. So he cant rely on the decisions already taken by others. In designing the investment portfolio, the investors should consider their financial goals, risk tolerance and other constraints.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), IAEME

The main objective of any investment is to make money. While making investment decisions, one must not be subjective. But the traditional financial literatures points out that the investors were rational because they made mistakes in decision making process. In the early years, investment was based on performance, forecasting, market timing and so on. In recognizing these mistakes and means to avoid them, to transform the quality of investment decisions and results, the researchers realized the impact of psychology in investment decisions. Thus, the researchers began to study the field of behavioral finance to understand the psychological processes driving these mistakes. Behavioral Finance suggests that investors decision making are not driven by due considerations and also often inconsistent. In simple words, human decisions are subject to several cognitive illusions like heuristic decision and prospect theory. Behavioural finance provides a different perspective, very complex and unconventional. Behavioural finance paradigm suggests that investment decision is influenced in a large proportion by psychological and emotional factors. Human emotional complexity includes the following primary feelings: fear, panic, anxiety, envy, euphoria, greed, satisfaction, ambition or vanity. Very likely that all these emotions interfere in certain proportions in a financial investment decision making (Birau, 2011). Some of the Behavioral finance theories predict that waves of irrational sentiment, i.e. optimistic or pessimistic expectations affect asset prices. Besides, individual investors do not trade dependently and are more likely to react market rumours at the same time in financial markets. If this herding effect does exist, market will be affected by systematic sentiments. Many researchers now agree that investor sentiment can be economically significant; the concept itself is still largely regarded as cryptic and abstract. Investor sentiment, defined broadly, is a belief about future cash flows and investment risks that is not justified by the facts at hand. Investor sentiment can be thought of as potentially erroneous beliefs that investors have about an aggregate economic variable, such as stock price. There are various factors affecting investor sentiments. From the literature review, it is understood that very few studies were undertaken in India on investor sentiments. Besides, these studies were not seriously taking into consideration on the relationship between age and the factors contributing investor sentiments. In this situation, it is felt necessary to undertake a study in these aspects. Hence the present paper tries to analyse the various factors like herd behavior, risk and cost factors, performance and confidence level and best game in the market etc. influencing investor sentiments in the Indian stock market. 2. REVIEW OF LITERATURE The following are the selected earlier research studies conducted in the area of Investor Sentiment. Antoniou, C. et.al. (2011) attempt to analyse whether sentiment affects the profitability of momentum strategies. They hypothesize news that contradicts investors' sentiment causes cognitive dissonance, slowing the diffusion of such news. Thus, losers (winners) become underpriced under optimism (pessimism). Short-selling constraints may impede arbitraging of losers and thus strengthen momentum during optimistic periods. Supporting this notion, they empirically show that momentum profits arise only under optimism. An analysis of net order flows from small and large trades indicates that small investors are slow to sell losers during optimistic periods. Momentum based hedge portfolios formed during optimistic periods experience long-run reversals. Barberis, N et.al. (1998) presented a parsimoniousmodel of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model was based on psychological evidence and produces both under reaction and overreaction for a wide range of parameter values. Bennet, E. et.al. (2012) in their a study examines the impact of herd behavior, internet led access to information and trading, macro-economic factors, risk and cost factors, performance
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), IAEME

Factors and confidence level of institutional investors, best game in town factors were tested by using the Bootstrapping method. The study reveals that the market specific factors had a significant impact on the investors sentiment in India. Celik, S. (2011) in his study aims to test the relationship between investor sentiment and sovereign risk in Turkey for the period 2004-2010. The findings support that there is no co integration, in other words long term relationship between investor sentiment and sovereign risk. In short run, the author found causality relationship from investor sentiment and sovereign risk. The findings of the paper are important for Turkish government officials and market participants. Zhang,C. (2008) made an attempt to defining, modelling and measuring investor sentiments in a new angle. Zouaoui,M. et.al.(2010) tested the impact of investor sentiment on a panel of international stock markets. Specifically, they examined the influence of investor sentiment on the probability of stock market crises. They found that investor sentiment increases the probability of occurrence of stock market crises within a one-year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd-like behaviour and overreaction or in countries with low institutional involvement. Results also suggested that investors sentiment is not a reliable predictor of stock market reversal points. 3. OBJECTIVES OF THE STUDY The main objective of the study is to identify and analyse the factors influencing investor sentiments in the Indian stock market. 4. HYPOTHESES 1. H0: There exist no significant relationship between gender of the investors and herd behavior. H1: There exist significant relationship between gender of the investors and herd behavior. 2. H0: There exist no significant relationship between gender of the investors and use of internet facility. H1: There exist significant relationship between gender of the investors and use of internet facility. 3. H0: There exist no significant relationship between gender of the investors and influence of macroeconomic factors on investments. H1: There exist significant relationship between gender of the investors and influence of macroeconomic factors on investments. 4. H0: There exist no significant relationship between gender of the investors and influence of risk and cost factors on investments. H1: There exist significant relationship between gender of the investors and influence of risk and cost factors on investments. 5. H0: There exist no significant relationship between gender of the investors and influence of performance and confidence factors on investments. H1: There exist significant relationship between gender of the investors and influence of performance and confidence factors on investments.

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), IAEME

6. H0: There exist no significant relationship between gender of the investors and influence of best game in the market on investments. H1: There exist significant relationship between gender of the investors and influence of best game in the on investments market. 7. H0: There exist no significant relationship between gender of the investors and factors influencing investor sentiments. H1: There exist significant relationship between gender of the investors and factors influencing investor sentiments. 5. RESEARCH METHODOLOGY The sample was collected from the state of Kerala. The present study is descriptive and explanatory in nature. Both secondary and primary data were collected and used for the study. The secondary data sources for the study include books, journals, periodicals, various websites, and government publications. The staffs in the arts and science colleges are drawing a reasonable amount of salary. According to recent studies, the equity cult of staffs in arts and science colleges is showing an increasing trend as compared to earlier times. Primary data required for this study were collected from 60 staffs (both teaching and non-teaching) in the NSS College, Nemmara who were selected by convenience sampling method. Multi-stage sampling was adopted for selection of respondents for the study. In order to achieve the objectives of the study, a well-structured questionnaire was developed. This was used for collecting primary data from the staffs. A number of experts/consultants in the field have been consulted and their suggestions were incorporated while finalising the questionnaire to ensure the content validity of the instrument. In the present study, the reliability of the scale of measurements used was assessed by using Cronbatch Alpha coefficient, which was above the minimum acceptable level, 0.80 there by confirming the reliability of the scale of measurement. The questionnaire developed for collecting primary data was administered to 60 staffs and their responses were collected through filled up questionnaire. The collected data were tabulated and analysed with the help of SPSS. The statistical tools used for analysis include Percentage, Mean, Standard Deviation, and ANOVA. 6. RESULTS AND DISCUSSIONS From the review of various literatures available in the area of investor sentiment the researchers identified various factors contributing investor sentiment as herd behaviour, internet led access to information and trading, macro-economic factors, risk and cost factors, performance factors and confidence level of institutional investors, best game in town. All these factors were provided with various sub variables and asked the respondents to rate these variables at five point likert scale as 5 as most important, 4 as important, 3 as neutral, 2 as not very important and 1 for least important. Based on the responses, the means were calculated. Herd behaviour is analysed with the help of sub variables like stories of successful investors, perception of easy money among investors, get rich quick philosophy, greed among investors, media focus on stock market, performance of internet stocks. Opinion on use of internet is analysed with the help of on-line trading, information gender, access to information access to tools and technology via the internet, ease of executing a trade, low cost of executing a trade .Influence of macroeconomic factors on investment decision is analysed with the help of the variables like interest rate, unemployment rate, rate of inflation and strength of Indian economy and VS other major currencies. Influence of risk and cost factors is analysed with the help of the variables like political Stability, investors tolerance for risk, technological advancement at company level and cost cutting at the operations level. Influence of performance
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), IAEME

factors and confidence level on investment decision is analysed with the help of the variables like Confidence level of institutional investors, strength of Indian economy versus major economies and performance of the Indian stock market. Influence of best game in the market on investment decision is analysed with the help of the variables like cant depend on other modes of investments like Provident Fund / Gratuity/ Post office savings etc., low rate of return in government bonds and target savings rate . Every investor is unique in all aspects due to various demographic factors like age, gender, marital status, socio-economic background, educational level, occupation etc. Investors demographic variables have a significant impact on investor sentiment. From the studies in the behavioural financial theories, it is clear that the gender of the investors has a very significant relation between their investment behaviour. So the present study analyse the relation between gender and factors contributing investor sentiment. The hypotheses were tested with the help of ANOVA. The Table 1 exhibits the result of ANOVA. ANOVA Sum of Squares herd_behaviour Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total 1.143 5.151 6.294 0.558 16.786 17.344 1.67 5.625 7.296 1.759 4.099 5.858 0.897 16.028 16.926 0.719 9.473 10.193 1.078 3.278 4.356

df 1 58 59 1 58 59 1 58 59 1 58 59 1 58 59 1 58 59 1 58 59

Mean Square 1.143 0.089 0.558 0.289 1.67 0.097 1.759 0.071 0.897 0.276 0.719 0.163 1.078 0.057

F 12.87

Sig. 0.001

1.928

0.17

technology_level

17.222

macro_eco_fact

24.887

risk_cost_fact

3.247

0.077

perfo_confi_fact

4.404

0.04

Best game

19.076

invest_sentiment

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), IAEME

From the ANOVA table it is clear that except in case of internet facility and performance and confidence factors on investments all other factors are found to be significant at five per cent level. Therefore, we accept alternative hypotheses for the same and null hypotheses for the insignificant relation. Thus the result proved the hypotheses stated as: 1. H1: There exist significant relationship between gender of the investors and herd behavior. 2. H1: There exist no significant relationship between gender of the investors and use of internet facility. 3. H0: There exist significant relationship between gender of the investors and influence of macroeconomic factors on investments. 4. H1: There exist significant relationship between gender of the investors and influence of risk and cost factors on investments. 5. H1: There exist no significant relationship between gender of the investors and influence of performance and confidence factors on investments. 6. H0: There exist significant relationship between gender of the investors and influence of best game in the market on investments. 7. H1: There exist significant relationship between gender of the investors and factors influencing investor sentiments. 7. CONCLUSION

From the forgoing discussions it is clear that the momentum in the Indian stock market is highly influenced by the investor sentiment. Hence it is very essential to study the investor sentiment in different perspectives. We expect that the present study will give an insight into the factors contributing/influencing investor sentiment and how the gender of the investor influence the factors of investor sentiment. If the companies can analyse the investor sentiments and predict the momentum in the stock market, they can attract more and more investments and can be a part of economic development of the country. 8. REFERENCES 1. Anbar, A., and Eker, M. (2010). An Empirical Investigation for Determining of the Relation between Personal Financial Risk Tolerance and Demographic Characteristic. Ege Academic Review, 10(2), 503-523. Atmaramani.(1996).Restoring Investor Confidence. The Hindu Survey of Indian Industry, 435-437. Banarjee and Abhijit,V.(1992). A Simple Model of Herd Behavior. Quarterly Journal of Economics,107, 797-817. Barberis, N., Shleifer, A., and Vishny, R. (1998). A Model of Investor Sentiment. Journal of Financial Economics, 49(3), 307-343.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), IAEME

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Bennet, E. et.al. (2012). The Impact of Investors Sentiment on the Equity Market: Evidence from Indian Stock Market. African Journal of Business Mangenderment, 6(32), 9317-9325. Brinson, G. P., Hood, L. R. and Beebower, G. L. (1986). Determinants of Portfolio Performance, Financial Analysts Journal, 39-44. Chen, G. M., et al. (2004). Behavior and Performance of Emerging Market Investors: Evidence from China. Unpublished Washington State University Working paper (January). Devakumar,V.K.(1987). Indian Stock Market (unpublished Doctoral Dissertation). Institute for Finance Mangenderment and Research, Madras. Hair, J. E., et al. (2003). Essentials of Business Research Methods, New York: Wiley. Holtzman, W. H. (1968). Cross-cultural Studies in Psychology. International Journal of Psychology, 3(2), 83-91. R.Karthik and Dr.N.Kannan, Impact of Foreign Direct Investment on Stock Market Development: A Study with Reference to India, International Journal of Management (IJM), Volume 2, Issue 2, 2011, pp. 75 - 92, ISSN Print: 0976-6502, ISSN Online: 0976-6510. Dr. Shivakumar Deene and Prof. Satyanarayan Pathi, Investors Awareness about Capital Market Investments: A Study with Special Reference to Karnataka State, International Journal of Advanced Research in Management (IJARM), Volume 4, Issue 3, 2013, pp. 1 - 17, ISSN Print: 0976 6324, ISSN Online: 0976 6332. Sindhu.K.P and Dr. S.Rajitha Kumar, Influence of Characteristics of Mutual Funds on Investment Decisions A Study, International Journal of Management (IJM), Volume 4, Issue 5, 2013, pp. 103 - 108, ISSN Print: 0976-6502, ISSN Online: 0976-6510.

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