LABUAN FACULTY OF

INTERNATIONAL
FINANCE
FAKULTI KEWANGAN
ANTARABANGSA LABUAN
JALAN SUNGAI PAGAR, 87000 FT. LABUAN
TEL (0): (+60)87-460486 / 466719

GA20003 MONEY AND CAPITAL MARKET

SESSION 1 2021/2022

INDIVIDUAL PROJECT : CASE STUDY

PREPARED BY :

NAME : MOI KE XIN

MATRIX NUMBER : BG20110055

PHONE NUMBER : 014-2467499

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 Critical Review: Investors’ Decision Making in Stock Investment based on Stock
Market Perception, which affected by the External Investment Environment Factors

This article related to the issues of the external investment environment factors to the
investors’ stock market perception and how the stock market perception gives the impact on
the stock investment (Khan et al., 2021). Thus, this is also the main issue will be discuss later
in addition there are 3 variables such as investment environment, stock market perception and
stock investment that will be focus in this review. According to (Vanags & Butane, 2013) the
implementation of a sustainable investment environment has progressively become a key
component of national strategic development plans across the world. Therefore, there are
several external investment environment factors including stock market performance,
neighbourhood effects, political issues, government policy and economic indicators (Khan et
al., 2021) will be explain in this review on how they affect the stock market perception.
Coming to stock market perception, it can be define as the understanding of an investor as the
synthesis in the stock market. Depending on their own beliefs and information process skills,
as well as the financial instruments they wish to trade, investors evaluate information in a
variety of ways (Liebmann et al., 2016). As a result, one of the difficulties noted by (Khan et
al., 2021) is that economic uncertainty might change investors' views, impacting their
financial health and willingness to exit the market.

The most critical factor of the external investment environment in this journal article
is political issue, especially for the emerging markets. According to (Günay, 2016), political
risk has a considerable impact on stock returns, and it is more significant in emerging markets
than in mature markets. At the same time, the author found that in the previous decade,
political risk has increased in established economies compared to emerging markets. Hence,
the investors intend to enter emerging markets are aware of the risk for instability as a result
of government turnover and the accompanying policy changes in the foreign and domestic
relations. The authors show that most multinational corporations favour a "good citizen
policy" as a strategy of reducing political risk, based on an analysis of the political risk
assessment techniques of 22 Malaysian-based foreign companies. The investigation by (Khan
et al., 2021) which is the investors will change their decisions on stock market due to
personal investment strategy and investment in securities when there are changes in political
environment, had matched with the statements above.

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 The another external investment environment factor that would change the investors’
stock market perception is the performance of the stock market which is also an essential
element for investors in making their decisions. In the research of (Cook et al., 2006), they
measure the performance of an organization using the holding period returns from the offer
date to the minimum of 36 months instead of applying the profits per share. The author also
reported that the investors will be attract to invest if there is a positive stock market
performance. The investors keep holding a positive perception about the short-term in the
past resulting in low level of risks and greater returns in the future. Therefore, the investors
are more prefer to hold a short-term securities due to the stock performance in the past (Khan
et al., 2021).

Government policy gave an important impact on the stock prices as well as the stock
market perception of the investors. If the company are able to get benefits from the
government in terms of economic, the company will get a better performance which is
increasing in their profitability and at the same time this will be the attraction for the
investors to invest (Belo et al., 2013). According to Ferguson & Lam (2016), the volatility of
stock return and the news-based sentiment index have a positive relationship, with more
volatility during periods of strong national debate. Belo et al. (2013) have documented the
same statement by using the example of the presidencies of United States. The companies
which benefit from the government will facing a high level volatility of profitability if the
government policy is uncertainty even though the companies should get higher returns for
their stocks; in turns, if there is less uncertainty in government policy, the companies will get
lower risks although they just able to earn lower returns. The authors also reported that the
stock returns from lower government exposure are obviously having higher returns than the
higher government exposure. This had determined the research by Khan et al. (2021) which
is the investors are likely to invest only if there is a lower government policy risk.

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 References

Belo, F., Gala, V. D., & Li, J. (2013). Government spending, political cycles, and the cross section of stock
returns. Journal of Financial Economics, 107(2), 305–324.
https://doi.org/10.1016/j.jfineco.2012.08.016

Cook, D. O., Kieschnick, R., & van Ness, R. A. (2006). On the marketing of IPOs. Journal of Financial
Economics, 82(1), 35–61. https://doi.org/10.1016/j.jfineco.2005.08.005

Ferguson, A., & Lam, P. (2016). Government policy uncertainty and stock prices: The case of Australia’s
uranium industry. Energy Economics, 60, 97–111. https://doi.org/10.1016/j.eneco.2016.08.026

Günay, S. (2016). Is political risk still an issue for Turkish stock market? Borsa Istanbul Review, 16(1), 21–
31. https://doi.org/10.1016/j.bir.2016.01.003

Khan, M. T. I., Tan, S.-H., Chong, L.-L., & Goh, G. G. G. (2021). Investment environment, stock market
perception and stock investments after stock market crash. International Journal of Emerging
Markets, ahead-of-print(ahead-of-print). https://doi.org/10.1108/IJOEM-03-2021-0456

Liebmann, M., Orlov, A. G., & Neumann, D. (2016). The tone of financial news and the perceptions of stock
and CDS traders. International Review of Financial Analysis, 46, 159–175.
https://doi.org/10.1016/j.irfa.2016.05.001

Vanags, J., & Butane, I. (2013). Major aspects of development of sustainable investment environment in
real estate industry. Procedia Engineering, 57, 1223–1229.
https://doi.org/10.1016/j.proeng.2013.04.154

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