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JAMR
17,1
66
Received 21 March 2019
Revised 6 June 2019
Accepted 15 June 2019
Journal of Advances in
Management Research
Vol. 17 No. 1, 2020
pp. 66-83
© Emerald Publishing Limited
0972-7981
DOI 10.1108/JAMR-03-2019-0041
Impact of investor sentiment on
decision-making in Indian stock
market: an empirical analysis
Haritha P.H. and Rashmi Uchil
School of Management, National Institute of Technology, Surathkal, India
Abstract
Purpose – The purpose of this paper is to analyze the relationship between the factors influencing investors
sentiment and investment decision-making (DM) of the individual investors. This paper proposes a unique
conceptual framework that incorporates the herding, market and awareness factors that are leading to
investor sentiment (IS) and decision-making process of the individual investors.
Design/methodology/approach – This study has conducted a questionnaire-based survey to collect data
from 875 individual investors through the convenience sampling method. Structural equation modeling was
used to evaluate the relationship between factors, namely, market effect, herd behavior, media, social
interaction and advocate recommendation that influences IS and DM.
Findings – The present study found that market effect and herding are the most significantly influencing
factors of investors sentiment. Among the sources of awareness, the internet has the lowest influence when
compared to media, social interaction and advocate recommendation.
Practical implications – This study will help individual investors to avoid the problems faced while making
an investment decision. The study could help investors to select a suitable investment aid and avoid repeating
expensive errors, which arise due to investors’ sentiment. It is recommended to increase the awareness
regarding investors’ sentiment among individuals, so as to increase their understanding about the financial
settings and to make them confident while investing. The present study also sheds light upon the behavior of
Indian individual investors so that policymakers can take appropriate measures to provide the proper guidance.
Policymakers can conduct awareness campaigns to increase investors’ knowledge on the market condition and
to enhance proper investment DM among them.
Originality/value – To best of the authors’ knowledge, previous studies have focused on limited factors at a
time. The present study has investigated how factors influencing investors sentiment, namely, market factors
(MF), herding as well as awareness would influence investment DM among individual investors in India. The
influence of these factors has never been studied simultaneously in the context of Indian individual investors’ DM.
Keywords Herding, Investor sentiment, Investment decision-making, Market effect, Awareness factors
Paper type Research paper
1. Introduction
In the financial market, the competition has increased day by day and the new players are
entering the market to make the competition more stringent. Kahneman and Riepe (1998)
suggested that respondent judgment is made about the probabilities of the occurred
outcome based on the market value. Thus, these beliefs and values are jointly considered in
the formation of preferences about the options in risky investments. Malkiel and Fama
(1970) found the efficient market hypothesis to which all the available information at a
specific time is efficiently integrated while estimating the financial asset prices. Neumann
and Morgenstern (1944) pointed out that modern economics shows that, in a rational
manner, people select between alternatives. Markowitz (1952) found that modern financers
assume that markets are efficient for the probability distribution of future market risk.
Slovic (1972) focused on the significance of this research on decision-making (DM) on
behavioral finance. Particularly, these finance theories came from various people at various
points in time. Qin (2012) suggested the evidence that individuals have a tendency to
observe other informed traders before investment DM. It is done under the conditions of
uncertainty. Specifically, the selection of the stock among different alternatives of the stock
created on the information is to be analyzed and the gathered (Nofsinger and Varma, 2014).
Statman (2011) suggested that investor needs and wants are basically driven from their DM in Indian
investment DM, for instance, an investor needs a high return on their investment. Barber stock market
and Odean (1999) studied that the study of behavioral finance was to find out how
investment decisions are taken and the investors behave for their investment DM. The
major objective of the study is the factors that influence the investors’ sentiment on their
investment DM.
Previous researchers mainly focused on investor sentiment (IS), stock market return and 67
volatility (Baker and Wurgler, 2007; Brown Cliff, 2004). However, recent studies are mainly
focused on psychological and emotional factors that play a significant role in investor DM
(Shefrin, 2002; Statman et al., 2006; Metawa, 2018). This paper aims at the relationship between
factors like herding, market, media, internet and advocate recommendation leads to IS and
investment DM of the individual investor. In the financial system, the stock market is the most
dynamical part of the development of the economic system. The investor is the backbone of
the stock market and the development of the country. The main problem faced by each and
every investor is lack of awareness about the stock market scenario. Improper investment in
stock and other financial business will put the investors in a crisis situation regarding their
existence in the market. Most of the investors are at a stage such that giant losses cannot be
affordable to them and impossible to come back to the existing financial stage. Media and
mass information sources are easily accessible about investment, so the options for selecting
stocks are also more. Mass information combined with the past experiences makes the
investors overconfident in their judgment leading to common investment patterns. Sometimes
this leads to trouble and judgmental error when an investor goes for a huge investment.
The most recent literature shows that psychological and emotional factors such as
overconfidence, fear and greed play an important role in investment DM (Daniel et al., 1998;
Shefrin, 2002; Lo et al., 2005; Statman et al., 2006). The study regarding this emotion will not
only help to realize an investor’s own weakness and strength but also to the advisors giving a
better opinion about the investment to those clients coming to his guidance. Most of the
previous studies are focused on developed economies neglecting the emerging Asian
economies make the study relevant. There is a scarcity of studies in behavioral finance
covering the Indian stock market. This study tries to overcome this limitation by examining
the behavioral factors that influence IS and investment DM.
This paper aims to analyze factors, influencing the relationship between IS and DM of
the Indian stock market, such as herd behavior (HB), market factors (MF) and awareness
factors (AW). The AW again are classified as media, internet, social interaction and
advocate recommendation.
This paper is structured are as follows. Section 2 describes the literature review of the
factors which influence IS. Section 3 gives the hypothesis of the study. Section 4 presents the
research methodology of this study. Section 5 is the conceptual framework of the investor’s
sentiment in the stock market. Section 6 presents the result of the structural equation model.
Section 7 represents a discussion of the study. Sections 8 and 9 describe the implication and
conclusion of the study.

2. Literature review
In this section, it mainly discusses the literature on individual sentiment and their factors that
influence investment DM. Psychological effects on the financial activities and the subsequent
effect of these actions on other economic agents in a financial market are studied under
behavioral finance (Sewell, 2007). It mainly relates to the influence of psychological changes of
specialists in finance and its subsequent effect on the stock exchange (Sewell et al., 2010).
Metawa et al. (2018) suggested that the relationship between investment DM and demographic
characteristic (gender, age, experience and education level) through the mediating factors of
behavioral factors (overconfidence, IS, HB, overreaction and underreaction). The main
JAMR findings of this study concern common investor behavioral patterns and the growth of the
17,1 stock market. Gao and Yang (2018) pointed out that relationship between IS on market return
and trading behavior. The result shows that high IS and trading behavior positively influence
behavioral return and sentiment return. Kumar and Goyal (2015) studied four common factors
that can affect the decisions of the investor such as herding bias, disposition effect,
overconfidence, and home bias or familiarity bias. Statman (2011) pointed out that the wants
68 of an investor always act as a driving force in the DM. The needs of the investor are based on
a single point of view that looks at high returns through mass purchasing. Previous studies
indicated that overreaction and underreaction of investors on the news will affect the decision
at any stage of marketing strategy and its result are always unpredictable (DeBondt and
Thaler, 1985; Lai et al., 2001). Expectations of a high return in the stock are the market
sentiment, and it is an individual viewpoint for an investor in a global market. Under reaction
or overreaction toward the change in price may be due to any variation in market information,
the price of the stock and basics of the underlying stock. There is sufficient influence on
investor’s DM power to changes in MF that are empirically proved. The study illustrates that
under-reaction (Lai, 2001) or over-reaction (DeBondt and Thaler, 1985) toward the change in
the news can make an outcome of various trading strategies and thereby make a change in
investor decision. The research taken by Waweru et al. (2008) explained the behavior of
investor can have an effect up to a certain level of the change in stock pricing. Investors
mostly prefer stocks that they feel have increased their value in the last few years (Odean,
1999). Stock price changes are always a notifying event in the stock market for an investor.
Moreover, investors may make faulty judgments of estimate factors affecting the DM on
investment when dealing with a stock return in the case of a change in price (Waweru et al.,
2008) for the marketplace that have an influence on DM of an investor. The main factors are
fundamentals of underlying stocks, past trends of stocks, over-reaction to price changes, price
changes, customer preference and market information are the major MF. Luu (2012) stated
that market efficiency is the basic stock market natures are reflected on the market price and
that surplus income on the average are flattened out in the long run. Odean (1999) also opined
that the DM of an investor can be affected due to stoke price change.
Herding can be well-defined as “mutual imitation that leads to a convergence of action”
(Hirshleifer and Hong Teoh, 2003). In these things are the common fault where investors
tend to follow the decision-making of the investments. Behavior as a method by which
market participants base their investment decisions and it is certain collective arrangements
alone, defeating their own opinions (Chang et al., 2000). Patterson and Sharma (2007)
contended that “herding occurs when a group of investors trades on the same side of the
market in the same securities over the same period of time or when investors ignore their
own private information and act as other investors do.” Herding is the investor tendency to
follow identical sources of information and understand the signals leading to a similar
approach and common investment decisions (Hirshleifer et al., 1994). When herding
happens, what everyone else does, individuals do and even when the suggestion of their
private information should take various decision (Banerjee, 1992). Chang et al. (2000) noted
the process of this behavior by which market participants based upon their belief alone
made investment decisions. Kumar and Goyal (2015) suggested that the biases of herding
are to explain when rational people are mimicking the irrationality of
the behavior while making investment decisions. In stock markets, investors have to
estimate the future prices of the stock on the basis of various sources of uncertain
information (Andreassen, 1988; Svedsater et al., 2009). Devenow and Welch (1996) and
Sciubba (2000) pointed out that behavioral pattern is correlated among people.
According to Patterson and Sharma (2006) “information cascades occur when trading
sequences initiated by a buyer or seller are higher than those sequences that would occur if
each investor made their decision on the basis of their private information.” There is a
mutual linkage between herding and market sentiment (Hwang and Salmon, 2009). Noctor DM in Indian
et al. (1992) defined financial awareness as “the ability to make informed judgments and to stock market
take effective decisions regarding the use and management of money.” Investors generally
make investments with the advice of their friends, brokers, relatives to follow certain
websites or news channels. Investors awareness level is a significant factor that affects the
behavior of the investment (Das, 2012; Talluru, 1997). Based on the earlier research, the
researcher has not focused on awareness effect, which is an essential component of equity 69
market investor DM. Past studies (Lusardi and Mitchell, 2008; Hilgert et al., 2003) found that
a lack of awareness about stock market investors while investing the stock. Takeda et al.
(2013) pointed out that investors AW and DM of the investors.
For the textual sentiment, internet posting is a potentially valuable source because several
individuals spend a significant quantity of time each day for writing and reading post on the
internet regarding the stocks items. The message flows comprise potentially valuable insights,
manipulative behavior and reactions to other sources of news (Das and Chen, 2007). Chen and
Chen (2018) studied that online news articles and financial blogs are highly influencing IS in
the stock market through the perspective of behavioral finance. According to Campbell and
Shiller (2001) suggested that “Internet plays an important role in keeping financial markets
better informed. Investors get their information from the internet in several ways and from
various suppliers.” Internet posting is mainly helpful for stock exchanges, brokerage firms,
banks and investment as sources of information about their financial products (Campbell and
Cecez-Kecmanovic, 2011). Griffith et al. (2019) studied that the relationship between media and
the market volatility and return, it seems, IS is to predict the level of the market return.
High-significance news induces a higher market movement. In the case of investment negative
news and sentiments have a larger influence than optimistic news (Klubmann and Hautsch,
2011; Smales, 2012). Lillo et al. (2015) found the influence of overnight return and overnight
news on the succeeding activity of trading and trading polarity on the various kinds of
investments. Tetlock (2007) pointed out that IS could be affected by the market based on a
psychological relationship between market prices and news. Shiller (2006) investigated buying
and selling decisions among traders, pointing out that news plays a crucial role as they
regularly respond on newly incoming information. It says that news media is a significant
participant in building market sentiment and related thinking, and thus, it is especially
contributing to HB that affects the movement of prices on capital markets. Solt and Statman
(1988) and Clarke and Statman (1998) suggested that sentiment does not estimate future stock
movement. Wang et al. (2018) found that the influence of media coverage on stock market
return and IS, and this effect is highly significant among the various degrees of media
coverage of the stock group. In many cases, media is the major source of awareness about a
product. So it is clear that media is the most significant factor that affects the process of
investment DM. Tetlock (1997) conducted a systematic investigation of the relationships
between stock market activity and media. The study analyzed a forthright amount of content
in media that appears to correspond to either risk aversion or adverse effect on investor
sentiment. Kräussl and Mirgorodskaya (2014) looked at the impact of news media sentiment
on financial market returns and price variation in the long term. Moreover, investigating the
investment decision of stock market investors of sentiment is a necessity for successful
investment strategies. The main awareness variables are media, internet, magazine, friends
and family and stock analyst report. The interactions between the media and the stock market.
Previous studies found out that the effect that media sentiment has on stock returns
(Ferguson, 2014; Tetlock, 2007; Statman, 1998; Fisher and Statman, 2000).
The stock market is made up of several participants who interact with each other and
with society at large. Therefore, the collective level of optimism or pessimism in society
could impact investor decisions (Loewenstein, 2001). Hong et al. (2004) suggested that social
interactions alter the stock market participation of individual investors. Campbell (1963),
JAMR Sherman and Fazio (1983) and Ajzen (1988) suggested that social influence plays a
17,1 significant role in attempts to predict human attitude. Duflo and Saez (2002) pointed out that
social interaction impacts the investor’s behavior; hence, the financial market decisions are
made. Hong et al. (2004), Kaustia and Knüpfer (2012) and Brown and Taylor (2010) studied
that social interaction could affect the stock market participation of individual investors.
Ivković and Weisbenner (2007), Heimer and Simon (2012) and Hvide and Östberg (2015) and
70 Heimer (2016) established that social interaction matters for individual investors’ trading
behavior. Shiller and Pound (1989) pointed out that interpersonal communication is
important for professional and individual investors’ DM. According to Campbell and Shiller
(2001), “investors use the Internet as an important information source to keep informed
about the financial markets and about the securities traded on those markets, which leads to
a higher rate of decisions being made, based on this social interaction source.” The
significant aspects that guide the behavior of investors, such as a self or firm image
coincidence, personal financial needs, neutral information, advocate recommendations and
accounting information could possibly have a significant impact on financial markets
(Al Tamimi, 2006). Ke and Yu (2009) found out that financial analysts play the main role in
financial markets as issuing recommendations, earnings forecasts and information
intermediaries that helps investors in their investment DM. Advocate recommendation
mainly focused on friend’s recommendation, family member recommendation, brokerage
houses and individual stockbrokers. The investor who already holds a stock may respond to
an analyst recommendation in various ways like the investor may hold or sell stock
recommendation (Francis and Soffer, 1997). Corredor et al. (2019) found that the stock
characteristic role has an impact of IS based upon the analyst recommendation. Nagy and
Obenberger (1994) suggested that advocate recommendation mainly includes individual
stockbroker, friend or coworkers and recommendations from a brokerage house. Shiller and
Pound (1989) contended that interpersonal communication as a major component of the DM
of an investor. Krishnan and Booker (2002) found that analyst’s advice that can vary the
investor’s decisions to find out the techniques to arrive at decisions on the hold and sell.
IS indicates the overall level of attitude of investors toward stocks in the financial
market. This indicates moods, feelings and expectations of investors that may have an
impact on their investment DM. Sentiment influences the price movement of a security in the
market, whether the bearish market fall in prices and bullish market rise in price, and it
leads to the belief about the risk of the security and future cash flow. Baker and Wurgler
(2006) defined that IS is the tendency to speculate the pessimism and optimism about stock
and state that IS has a high influence on volatile, young, small and non-dividend payers. As
a result, these stocks will be more likely to be affected by states of optimism. Piccoli and
Chaudhury (2018) suggested the market movement of the investor psychology and IS index.
The main findings are that a low sentiment led to a strong overreaction. Bagnoli et al. (2009)
investigated that analysts tend to a great level of optimistic recommendations when the past
or recent IS is great, which means, they always try to recognize the analysts who are highly
influenced by IS. In the psychological literature, IS influencing their judgments about future
actions and their investment DM. Arkes et al. (1988) and Wright and Bower (1992) suggested
that psychological studies show that people with and negative sentiment make pessimistic
choices and positive sentiment make optimistic choices. Lakonishok et al. (1992) and Liao
et al. (2010) pointed out that IS can be a cause of investor investment decisions. It is proved
that IS is influences investment DM of individuals.

3. Hypothesis
The objective of the paper is two-fold: first, to analyze the nature of the relationship between
the factors which influence IS, and second to determine the kind of the linkage between IS
and investment DM of Indian stock market.
 The main hypothesis of this paper is to: DM in Indian
H1. There is a significant impact of factors influencing IS and investment DM. stock market
Based on the three behavioral factors analyzed in this paper, the following hypotheses
were formulated:
H2. HB influences on investment DM through IS.
H3. There is a significant impact of a market factor on investment DM through IS.
71
H4. There is a significant effect of AW (H4a: Media, H4b: Internet, H4c: Social
interaction, H4d: Advocate recommendation) on investment DM through IS.
H5. IS has a significant effect on and investment DM.

4. Research methodology
The study aims to investigate the influence of the behavioral factors on IS and investment
DM. For the present study, the quantitative technique was followed. A survey-based method
was adopted for collecting the data using structured questionnaires. The convenience
sampling technique was used to select individual investors in the Indian stock market.
Individual investors are spread all over India. As such, it may not be possible to use
probability sampling because of the large sample size. The questionnaire is inclusive of two
parts: demographic information and behavioral factors that influence IS in the stock market.
The questionnaires were circulated among 875 individual investors from the Karnataka
region. Out of the 875 questionnaires, 815 were returned that gave a response rate of
78 percent. Out of these, 15 responses were rejected because of incompletely filled responses.
Thus, 800 respondents were considered for further analysis. The structured data were
analyzed using AMOS and SPSS software. Zaichkowsky (1985) proposed for content validity.
The questionnaire was discussed and validated with the help of three academicians.
Furthermore, to recognize the unwanted questions in the questionnaire, a pilot study was
conducted. After that, the questionnaires were updated and used for the final data collection.
Factor loading of the variables, namely, HB, MF and AW were in the range of 0.713-0.962
which is higher than 0.7. Hence, all the value for the items were suitable as recommended by
Nunnally (1978). Exploratory factor analysis exposed that all the factors have an eigenvalue
higher than one. Kaiser–Meyer–Olkin (KMO) test sample adequacy test gives a value of 0.826
that is above 0.5 as recommended by Malhotra and Dash (2011).

5. Data analysis
The conceptual framework is bounded in this study to recommend the normal association
between IS and DM. It is evaluated based on the statistical models to identify the
psychological factors influencing IS and their components that may affect the investor’s
DM. The hypothesis is being tested with the technique of structural equation modeling. It is
the most suitable method used for getting the theoretical idea in various streams of the
analysis of the statistics. The different effects between the variables and the correlation
between them are obtained from the structural models. The indirect and direct connection
between the latent variables is also recognized from the structural modeling (Lin et al., 2005).
At a time, the model can process numerous activities that include indirect and direct
impacts, the relationship among variables, the acceptability of measurement and findings of
different assessment indicators (Farahmand et al., 2012).
In this study, DM is the latent variable. The latent variable is the factor that could be
inferred from the variables that are measured and that could not be observed directly. The
covariance among two or more variables can be taken as latent variables that means the factors
influence IS and lead to investment DM of individual investors.
JAMR In the case of the variable, the skewness is in ranges among ±1 (Table I). Hence, the data
17,1 are normal distribution (Hair et al., 2009). Furthermore, Sposito et al. (1983) suggested that
the kurtosis value is less than 2.20 that means data are free from the outliers.

6. The result of the structural equation model

The impact of IS on their DM is estimated by using a structural equation model with the
72 help of AMOS. DM is taken as a continuous composite variable estimated from its six
components. IS is a latent variable derived from investors optimism, participation and stock
market outlook. The model envisages that IS is mainly depending on MF, HB and AW.

Variables Mean SD Skewness Kurtosis

HB1 3.75 0.73 0.68 0.45

HB2 4.22 0.89 0.32 0.20
HB3 4.21 0.86 0.52 0.47
HB4 3.83 0.80 0.25 0.39
HB5 3.64 0.83 0.21 0.10
MF1 3.88 0.82 0.45 0.22
MF2 4.22 0.93 0.33 0.45
MF3 3.98 0.79 0.42 0.23
MF4 3.78 0.88 0.58 0.45
MF5 4.33 0.79 0.36 0.33
MF6 3.89 0.77 0.46 0.33
AWM1 3.84 0.86 −0.29 0.21
AWM2 3.58 0.98 0.66 −0.15
AWM3 4.00 0.96 0.54 1.30
AWM4 3.52 0.75 0.48 1.73
AWM5 3.55 0.93 −0.58 −0.79
AWSI1 4.46 0.88 1.08 −0.50
AWSI2 3.69 0.82 0.63 −0.61
AWSI3 4.26 0.64 0.29 0.68
AWSI4 4.47 0.74 −0.72 0.86
AWSI5 3.95 0.85 1.23 1.30
AWAD1 3.79 0.89 0.42 −0.46
AWAD2 4.42 0.82 0.48 1.77
AWAD3 3.47 0.18 1.19 1.27
AWAD4 3.43 0.79 0.32 1.90
AWAD5 4.47 0.98 0.28 −0.71
AWI1 3.11 0.97 0.61 1.06
AWI2 4.27 0.80 0.11 1.82
AWI3 3.42 0.94 0.49 1.56
AWI4 4.28 0.75 0.65 −0.42
AWI5 4.17 0.79 0.43 0.63
ISOP 3.88 0.78 0.42 0.14
ISPP 4.02 0.82 0.58 0.26
ISOT 3.99 0.87 0.44 0.44
DM1 3.53 0.90 0.63 1.80
DM2 4.00 0.97 0.58 0.18
DM3 4.46 0.91 0.02 0.28
DM4 3.89 0.90 0.69 0.30
DM5 4.35 0.79 0.52 1.40
DM6 3.20 0.88 0.57 1.24
Table I. Notes: HB, herding behavior; MF, market factor; AWM, media; AEI, internet; AWSI, awareness factor-social
Descriptive statistics interaction; AWAD, awareness factor-advocate recommendation; ISOP, investor sentiment-optimism; ISPP,
of the variable investor participation; ISOT, stock market outlook; DM, decision-making
Awareness is also a latent variable computed from four composite variables namely social DM in Indian
interaction, media, internet and advocate recommendation. stock market
6.1 Construct validation
Cronbach’s α (reliability α) of all the variable specifically HB, MF and AW were in the range
between 0.79 and 0.92 (Table II). The estimated results of reliability were suitable. Table II
as the values for Cronbach’s α are above 0.70; therefore, the measurements of the reliability 73
are considered (Chin, 2010).

6.2 Measurement model

For the measurement model, the technique of maximum likelihood estimation was used
because it gives effective outcomes (Hair et al., 2009). Different measurement models are
goodness of fit index (GFI) ¼ 0.979, adjusted goodness of fit (AGFI) ¼ 0.959, Tucker–Lewis

Variable Items Factor loadings Cronbach’s α CR AVE VIF

HB HB1 0.862 0.79 0.85 0.725 1.86

HB2 0.914
HB3 0.923
HB4 0.898
HB5 0.828
MF MF1 0.774 0.88 0.88 0.614 1.74
MF2 0.823
MF3 0.948
MF4 0.825
MF5 0.921
MF6 0.828
AWI AWI1 0.713 0.91 0.82 0.812 1.82
AWI2 0.962
AWI3 0.783
AWI4 0.895
AWI5 0.878
AWM AWM1 0.836 0.87 0.83 0.752 2.02
AWM2 0.736
AWM3 0.784
AWM4 0.923
AWM5 0.948
AWSI AWSI1 0.825 0.92 0.89 0.668 1.98
AWSI2 0.921
AWSI3 0.828
AWSI4 0.813
AWSI5 0.862
AWAD AWAD1 0.783 0.89 0.86 0.752 1.90
AWAD2 0.795
AWAD3 0.878
AWAD4 0.936
AWAD5 0.736
DM DM1 0.784 0.82 0.88 0.689 1.76
DM2 0.923
DM3 0.888
DM4 0.812
DM5 0.789
DM6 0.822 Table II.
Notes: HB, herding behavior; MF, market factor; AWM, media; AWI, internet; AWSI, awareness factor-social Measurement
interaction; AWAD, awareness factor-advocate recommendation; DM, decision-making of validity
JAMR index (TLI) ¼ 0.991, normed χ2 ¼ 1.722, comparative fit index (CFI) ¼ 0.994 and root mean
17,1 square error of approximation (RMSEA) ¼ 0.049 (Table IV ). In these outcomes were accepted.

6.3 Validity analysis

All the variables for the factor loadings items are more than 0.7 (Table II). All the latent
variables of the average variance extracted (AVE) were greater than 0.5 and all the variable
74 of the composite reliability (CR) were more than 0.7 (Table II). Hence, Hair et al. (2009)
recommended that all the outcomes were adequate.

7. Analysis of the structural model

Table III presents the regression weights of a model for the impact of IS on DM. From the
table, it can seem that MF, HB and AW have a significant positive effect on IS as the
significant levels of regression weights are less than 0.05. The highest influence on IS is
affected by MF. The IS increases 0.688 units for every unit increase in the MF. The effect of
herding behavior on IS is slightly lower than that of MF. Every unit increase in herding
behavior initiates 0.403 units in the IS. The lowest effect on IS is exerted by AW. A one-unit
increase in awareness makes 0.054-unit increase in the IS.
The awareness of investors is significantly determined by Social interaction (AWS),
Media (AWM), Internet (AWI) and Advocate recommendation (AWA). Media is found to
have the highest influence on the awareness of investors as the regression weights are
highest for this component (1.045). The other important components influencing the
awareness of investors are social interaction (1.032) and advocate recommendation (1.00).
The lowest influence on IS is from the internet (0.962). From Table III, it can be seen that IS
has a significant impact on the DM of the investors as the regression weight is 0.633 which
is significant as the significant level is less than 0.05. The result indicates that as the IS
increases the effectiveness of investment decision increases at the rate of 0.633. The figure
also supports the existence of positive associations between all IS and their dimensions of
the factors.

8. Discussion of this study

The outcomes of the measurement of the latent variables and the outputs of testing the
hypothesis are analyzed for structural relationships. In Figure 1, herd behavior, market
effect, internet, media, social interaction and advocate recommendation are taken as the
latent variables that act as a regulator of the investor’s sentiment. In the models, e1–e9 error

Estimate SE CR p

IS←AW 0.054 0.027 2.000 0.046

IS←HB 0.403 0.023 17.486 0.001
IS←MF 0.688 0.027 25.361 0.001
AWA←AW 1.000
AWI←AW 0.962 0.195 4.937 0.001
AWM←AW 1.045 0.194 5.388 0.001
AWS←AW 1.032 0.191 5.403 0.001
ISOP←IS 1.000
ISP←IS 0.929 0.008 123.212 0.001
ISO←IS 0.981 0.008 124.703 0.001
Table III.
Regression weights of DM←IS 0.633 0.020 31.014 0.001
a model for the impact Notes: HB, herding Behavior; MF, market factor; AWM, media; AWI, internet; AWS, awareness factor-social
of investor sentiment interaction; AWA, awareness factor-advocate recommendation; ISOP, investor sentiment-optimism; ISPP,
on decision-making investor participation; ISOT, stock market outlook; DM, decision-making
 0.28 0.01 DM in Indian
MF 0.01 0.00 0.02 stock market
e6 e7 e8
1 1 1
–0.15 0.69 0.10
1.28 ISOP ISP ISO e1
1
e5 AWS 1.00 0.93 0.98 1
1.33 1.03
–0.03 e4
1
AWM 1.04
–0.01
0.05 0.63
75
0.27 –0.02 1.37
IS DM
1 0.96 AW
e3 AWI
1.24 1.00 1
1 0.02
e2 AWA
0.40
e9
–0.16
0.31 Figure 1.
Model for the impact
HB of investor sentiment
on decision-making
(unstandardized
Notes: MF, market factor; AW, awareness factor; HB, herding behavior; IS, estimate)
investor sentiment; DM, decision-making

variables associated with the independent latent variables. The measurement model
consists of six in number in the figure and the model is related to DM, market effect, internet,
media, social interaction and advocate recommendation. Table IV shows the degree of fit
indices from fair to good for structural model analysis. The complexity of the model can be
corrected using a parsimonious index called RMSEA. If the selected parameter estimates fit
the population covariance matrix, then the RMSEA can be taken as a good model (Byrne,
1998). The discrepancy per degree of freedom is the measure taken as RMSEA and the value
achieved is 0.049 that can be considered as a good fit as the acceptable threshold is 0.07
(Browne and Cudeck 1993). TLI values in the present study, is estimated that 0.991.
However, these indices are more strongly affected when the sample size is small. Byrne
(1997) suggested that the CFI is more suitable when the sample size is small. The estimated
CFI value is mainly used for the linkage between the baseline and proposed models. CFI
estimated values higher or near 0.9 is a model fit for the good index. In this study, the value
is 0.994 that means it a good model. The GFI is an alternate to the test of χ2 and calculates
the variance of the percentage that is accounted for the covariance of the expected
population (Tabachnick and Fidell, 2007). By considering the covariance and the variances
are accounted for the model, which indicate how relatively the model arises to repeating the
observed covariance matrix (Diamantopoulos et al., 2000). The GFI of this model is 0.979 and
it is more applicable. Bentler and Bonett (1980) suggested the normed fit index (NFI) model

Indices Calculated value Acceptable threshold level

RMSEA 0.049 o0.07

GFI 0.979 W0.95
AGFI 0.959 W0.95
RMR 0.011 o0.08
Table IV.
NFI 0.991 W0.95 Model fit summary of
TLI 0.991 W0.95 the impact of investor
CFI 0.994 W0.95 sentiment on decision-
Source: Data analysis making
JAMR that assesses the comparing the χ2 value of the model. The ranges from the values are
17,1 0 and 1, which indicate that it is a good fit. In this study, the NFI value is 0.991, and this
model is a good fit. Both the GFI and NFI bring within the estimated norms, the model is
depicted as a good fit.
The fitted model for the impact of IS on DM is found to be valid as the values of GFI,
AGFI, NFI, TLI and CFI is greater than 0.95, whereas RMSEA and RMR are less than 0.08.
76 Analysis of path coefficients and significance values of relationships leads to the conclusion
that all hypotheses are supported. Results of testing of the hypotheses are summarized in
Table V. This study proves that IS has a positive and significant effect on behavioral factors
and investment DM.
The Indian stock market is the world fastest growing emerging market (Poshakwale and
Mandal, 2014). The conceptual framework developed in the study shows how the factors
like HB, MF, media, internet, social interaction and advocate recommendation are
influencing IS and DM involved in the investment. The model proves that these factors have
an immense impact on IS and shows how it leads to investment DM.
The result of the study undertaken by Lin (2011) and Kumar and Goyal (2016) indicates
that there is no direct relationship between herding behavior of an investor and their DM,
whereas (Metawa et al., 2018) claimed the existence of direct relationship between herding
behavior and investment DM that shows that there is no influence of any factors between
these two variables. The result of this study highlights that herding behavior has an indirect
influence on DM as there is the existence of IS as a factor. Even though an investor is having
good knowledge of fundamental and technical analysis in investment, still they may not be
confident in taking decisions by themselves so they indulge in herding activity. As a result,
it influences the IS ultimately leading to DM. The findings of this paper are in line with the
results of Bennet et al. (2012). Internet is a great source of knowledge to an individual
investor be it an amature or a professional. This makes an individual confident while buying
and selling of stocks ultimately turning them from amature to professional investors. The
findings of this study along with Freund and Diana (2001) and Brad and Terrance (2001)
prove that internet plays a major role in knowledge enhancement and has a direct
relationship with the IS. MF are the combination of other factors like price changes, market
information, past trends of stocks, fundamentals of underlying stocks, customer preference
and over-reaction to price changes. Investor conduct fundamental and technical analysis
based on these MF with the major aim of enhancing the knowledge of the investor. The
result of such an analysis shows the positive influence of MF on IS. This statement is
supported by the result of Waweru et al. (2008) along with the findings of this paper,
whereas a contradictory result was put forward by Kengatharan and Kengatharan (2014).
The present study was to examine the factors that are influencing IS and investment DM of
the individual investors, whether investor invests in the stock market, they influence
friends, family, internet, peer group and media.

Nos Hypothesis description Items Hypothesis supported

1 Herd behavior – investor sentiment H2 Yes

2 Market factors – investor sentiment H3 Yes
3 Media – investor sentiment H4a Yes
4 Internet – investor sentiment H4b Yes
5 Social interaction – investor sentiment H4c Yes
Table V. 6 Advocate recommendation – investor sentiment H4d Yes
Summary of the 7 Investor sentiment – decision-making H5 Yes
testing of hypotheses Source: Data analysis
9. The implications of the study DM in Indian
The present study contributes to the current body of knowledge in the field of stock market
behavioral finance and investment behavior in the Indian context. Investment DM by
investors in the stock market is a difficult task. Hence, this study tries to contribute to
the literature on behavioral finance in the context of Indian individual investors. The
study provides valuable insight to investment practitioners, academicians and
policymakers. It offers a new perspective on the ongoing debate of whether IS should 77
be viewed as irrational or rational. In an individual level, IS on the stock market can
influence their investment decisions. The present time is witnessing a remarkable
increase in the availability of resources. The various sources of the information in
the online platform could help an investor to share information and opinion about the
product in the stock market. Thus, mix investment strategies using quantitative and
qualitative behavioral finance tools should help investors to select the proper kind of
investment strategy.
In this study, it is shown that awareness level factors can have an extended effect on the
IS, hence, affecting their financial performance. Hence, media could influence IS that may
lead to investors emotional fluctuations and affect their DM. Increasing the usage of the
media and internet by investors play an important role in shaping their mindset, IS and their
DM. This study helps investment advisors to understand the attitude of the clients and to
use effective means of communication while trying to increase awareness among their
clients. Herding behavior has an impact on IS and their DM. The lack of reliable information
portrays the need that individual investors should choose good investment information
sources for their investment decisions. Ultimately, this study offers different perceptions of
investors, as they can understand the trading behavior and compare it with their own
investment characteristics.
The study will help stakeholders understand how investors’ biases affect investment
decisions. IS provides the level of confidence that may forecast future performance. The
present study suggests that investors may make predictions to make better financial
judgments and their decisions based on IS.
The financial advisors can gain a better grasp of their clients’ psychology while
structuring their portfolios. Understanding the clients’ psychology would strengthen
their relationships with their clients considerably. In the study, investors were found
to have very less awareness of the individual investment decision-making process. Thus,
the investors are suggested to increase their awareness of their behavioral biases and on
the market mechanism. In the field of behavioral finance, this study is influenced by
different extraneous factors such as newspaper, media, analyst recommendation and
internet, etc. Therefore, a suitable method is to be followed while taking an investment
decision. Financial investors, the information should be presented in a simple manner.
Hence, aggregated well-diversified portfolio is presented for the individual investor.
A financial advisor has to ask the investor for taking risk capacity of their build their
behavioral portfolio instead of imaging the efficient portfolio building. In this situation,
the major implication for the financial advisor is to provide individual investor for
the relevant decision for clean and correct manner. Hence, it is useful for understanding
the client psychology and risk associated with asset decision. The suggestions given to
marketers are to provide an understanding of the decision-making process of individual
investors. It was found that investors considered only certain criteria to judge
the performance.
There are a number of implications for academics. This study expands the various
factors influencing IS that might influence investor behavior and performance. Previous
studies mainly concentrated on the factors influencing investment DM, whereas this study
presents the IS and investment DM.
JAMR 10. Conclusion
17,1 In recent times, the interest in behavioral finance has not just emerged; it has exploded into
different areas and to significant implications in the stock markets. This is because what
registers in the stock market fluctuations are not the event themselves, but the human
reaction to these events and how they may impact the future. The results of this study show
that different factors have significant implications in the Indian stock market. This research
78 enables the portfolio managers in identifying various indicators that predict the presence of
these biases in the Indian context. The major objective of this study was to test the effects of
the factors influencing IS and leads to DM. The data analysis revealed that investors are
highly influenced by the investment DM of the stock market. Moreover, individual investors
are focused on the equity investment of the stock market in India.
It is concluded from this research paper that IS does play a major role in the stock price
determination in the stock market around the world. It will be perfect if we say that stock
prices are driven by IS. The focus of this study is on the stock market investors with regard
to their judgmental errors. It aims to develop an efficient investment strategy to assist
investors in order to avoid errors and become aware of how possible biases can influence
their investment decisions. This result is supported by the study of Ricciardi and Simon
(2000). In academic research, further study should focus on validating the effects of IS and to
identify other sentiment proxies that are valuable.

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Further reading
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Corresponding author
Haritha P.H. can be contacted at: haritha.ph2@gmail.com

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