1. International Journal of Management (IJM), ISSN
INTERNATIONAL JOURNAL 0976 – MANAGEMENT (IJM)
OF 6502(Print), ISSN 0976 - 6510(Online),
Volume 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)
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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 it’s 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 can’t 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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2. 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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3. 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.
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4. 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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5. 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 can’t 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
technology_level
macro_eco_fact
risk_cost_fact
perfo_confi_fact
Best game
invest_sentiment
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
df
Mean
Square
F
Sig.
1.143
1
1.143
12.87
0.001
5.151
6.294
58
59
0.089
0.558
1
0.558
1.928
0.17
16.786
17.344
58
59
0.289
1.67
1
1.67
17.222
0
5.625
7.296
58
59
0.097
1.759
1
1.759
24.887
0
4.099
5.858
58
59
0.071
0.897
1
0.897
3.247
0.077
16.028
16.926
58
59
0.276
0.719
1
0.719
4.404
0.04
9.473
10.193
58
59
0.163
1.078
1
1.078
19.076
0
3.278
4.356
58
59
0.057
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6. 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.
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Volume 5, Issue 1, January (2014), © IAEME
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