Institute of Management Technology <br />Ghaziabad<br />Market Research on <br />Behavior of Indian Investors<br />September 2011<br />Submitted by:<br />Akash Jauhari<br />Table of Contents<br />Abstract……………………………………………………………………..…….….3<br />Introduction……………………………..……………………….…………………4<br />Research Methodology & Data Collection………………..………….5<br />Descriptive Statistics………………………………………………….……….6-8<br />Factor Analysis……………………………………………………………..……9-13<br />Cluster Analysis………………………………………………………………..14-17<br />Appendix……………………………………………………………………….…18-25<br />Abstract<br />Efficient Market Hypothesis believes that an investor takes decisions rationally, based entirely on economic fundamentals of the stocks. These fundamentals are generally the EPS, Book value, PE ratio along with the projected future cash flows of the firm and overall scope for growth in the sector. Thus theoretically, there should be no difference between the share trades of two firms with identical fundamental profile. However it is widely known that these classical theories do not fully explain or account for the actual trades and movements of the stock indices. Hence comes the concept of Behavioral Finance, which believes that investors are irrational, and are driven by emotions and sentiments. It says that while selling or buying a stock, an investor generally takes the decision based on his perceptions and beliefs rather than fundamentals. Therefore he commits mistakes because of his limited awareness, over confidence, influence of promoter or peer pressure.<br />Through this research we want to study the buying and selling behavior of an Indian investor with reference to following parameters/ perspectives:-<br />1. Individual Perspective (Product Affinity/ Aversion, Ethics, CSR, Charisma of the Leader, National/ Regional Bias) <br />2. Public Perspective (News in Media, Expert Comments, Frequency of Advertisement, Government Supported Sectors, Prevailing Market Sentiments)<br />3. Acquaintance Perspective (Broker, Parents, Spouse, Peers, Friends)<br />4. Fundamental Perspective (Revenues, Book Value, EPS, PE Ratio, Order Book)<br />The above study/ research is done between similar companies/sectors with comparable fundamentals and growth prospects. Thus, keeping all the other factors similar, we intend to find the effect/ impact of each parameter on the investing behavior.<br />To conduct the above research, primary data was collected from a survey.<br />Introduction<br />Behavioral Finance is the study of the influence of psychology on the behavior of financial analysts/ investors and the subsequent impact on the markets. The subject is of great importance and interest as it helps us explain why and how the markets might be inefficient.<br />Till date, research in behavioral finance has been scarce and limited. We believe that a better understanding of behavioral processes is essential for the investment advisors/ financial planners to acknowledge and appreciate the way Indian investors respond to market movements. This would help the advisors/ planners to devise better asset allocation strategies for their clients. <br />Our research aims at exploring the Indian Investor’s behavior while investing in various instruments. The study is important for individual investors, the government and the companies listed on stock exchanges (NSE & BSE).<br />From an investor point of view, the factors most influencing his/ her investment decision are important since those factors affect his/ her future financial plans. For companies, identifying the factors influencing the investment decisions of their clients/ customers affects their future policies and strategies. And finally, for the government, identifying the factors influencing the investor’s decisions is crucial to ensure the right legislations and procedures needed to satisfy the investor’s desires and provide support to achieve market efficiency. <br />Research Methodology & Data Collection<br />Our research intends to answer questions like:-<br />1. Do factors related to firm (product/ services/ ethics/ leader) affect the behavior of Indian investors?<br />2. Do external factors such as media reports/ views of the experts affect the behavior of Indian investors? <br />3. Is the behavior of an Indian investor influenced by peers, parents and colleagues?<br />3. To what extent do market fundamentals influence the Indian investors’ behavior?<br />We developed a questionnaire (to collect primary data) to understand the behavior of an Indian Investor, focusing on four broad categories, namely, individual perspective, public perspective, acquaintance perspective and fundamental perspective. Each perspective had five questions in it. Respondents were asked to indicate their degree of agreement to each question on a Five Point - Likert Scale. (1 - Least Likely and 5 - Most Likely)<br />The questionnaire was sent via email to exactly 100 individuals. We got 63 responses corresponding to a 63% response rate. The data received was then examined; the screening process resulted in rejecting 3 responses due to incomplete information. The analysis and final results are discussed below. <br />(The actual questionnaire can be seen in the appendix.)<br />Descriptive Statistics<br />The questionnaire containing twenty questions was circulated to the respondents randomly through an online platform. A total of sixty responses were taken for the study. Respondents were mostly B-School students, spreading across different cities of the country. The respondents were not told about any intensions of the study; neither were they asked about their names or identity. Apart from the responses to the questions, they were asked to furnish the following information – Gender, Age and Past Trading Experience.<br />Most of the respondents happened to be male, as shown by graph below.<br />One reason for the above difference can be the general inclination towards investing or trading for the two genders. However, almost equal respondents were with and without the regular trading experience. It should also be noted that almost all the respondents approached were aware of the financial markets and its mechanism.<br />As we have already mentioned, the questionnaire was designed with four sections – Individual perspective, Public perspective, Acquaintance perspective and Fundamental perspective, and the responses were taken on a scale of 1-5 (1 – Least Likely and 5 – Most Likely).<br />Following average scores for the four sections were obtained.<br />Thus it is clear that, on an average, the fundamental perspective was given the highest score. It appears that the company fundamentals (EPS, PE Ratio, Revenues etc.) influence the behavior of Indian Investors the most. But how do different people respond to different questions, and which factor is instrumental in influencing investors’ behavior, is determined in the study further.<br />Correlation Matrix <br />After summing individual responses for the four factors, we ran regression on the pair wise basis. These results are summarized in the table below –<br /> IndividualPublicAcquaint.Fundament. Individual10.420.470.027 Public0.4210.380.22 Acquaint.0.470.3810.066 Fundament.0.0270.220.0661 <br /><ul><li>As we can observe from the table, the correlation coefficients are generally low for all the pairs. The highest value being just 0.47.
It implies that the four factors considered are more or less independent. In other words, multi-co linearity is not a major issue. </li></ul>Coefficient of Correlation & Determination<br /> IndividualPublicAcquaint.Fundament.R0.730.720.720.49R-square0.530.520.520.24<br /><ul><li>Individual perspective seems to explain the total variation to maximum extend. Also the first three factors – Individual, Public and Acquaintance have more or less equal influencing effect.</li></ul>Factor Analysis<br />Factor analysis is a method of data reduction. It does this by seeking underlying unobservable (latent) variables that are reflected in the observed variables (manifest variables). There are many different methods that can be used to conduct a factor analysis (such as principal axis factor, maximum likelihood, generalized least squares, un-weighted least squares), There are also many different types of rotations that can be done after the initial extraction of factors, including orthogonal rotations, such as vari-max and equi-max, which impose restriction that the factors cannot be correlated, and oblique rotations, such as pro-max, which allow the factors to be correlated with one another. <br /><ul><li>Descriptive Statistics</li></ul>From the above table we find that all 60 observations were included for all the 20 variables. In other words there were no missing values.<br /><ul><li>KMO & Bartlett’s Test</li></ul>KMO and Bartlett's TestKaiser-Meyer-Olkin Measure of Sampling Adequacy..595Bartlett's Test of SphericityApprox. Chi-Square432.030df190Sig..000<br /><ul><li>Kaiser-Meyer-Olkin Measure of Sampling Adequacy - This measure varies between 0 and 1, and values closer to 1 are better. Here we are getting a value of 0.595, which is acceptable.
Bartlett's Test of Sphericity - This test tests the null hypothesis that the correlation matrix is an identity matrix. An identity matrix is a matrix in which all the diagonal elements are 1 and all off diagonal elements are 0. We are rejecting this null hypothesis at 99.99% confidence Interval. Hence the model passes the basic test to be able to give factor analysis results.
The values in this column indicate the proportion of each variable’s variance that can be explained by the retained factors. Variables with high values are well represented in the common factor space, while variables with low values are not well represented.
All the variables in our test are found to have high values, indicating that most of the variables are well represented by the founded factors.
Total Variance Explained</li></ul>CompInitial EigenvaluesExtraction Sums of Squared LoadingsRot SoSTotal% of VarianceCumulative %Total% of VarianceCumulative %Total% of Variance14.019.819.84.019.81184.108.40.206220.127.116.1118.104.22.1681.89.044.41.89.044.42.010.241.67.922.214.171.124126.96.36.199188.8.131.52.41.99.361.26.2184.108.40.206220.127.116.111.05.170.71.05.170.71.47.081.04.875.590.94.379.8100.73.483.1110.63.086.1120.52.788.9130.42.191.0140.42.093.1150.31.694.6160.31.496.0170.31.397.3180.21.298.5190.20.999.4200.10.6100.0<br /><ul><li>Factor - The initial number of factors is the same as the number of variables used in the factor analysis. However, not all 20 factors will be retained. In this example, only the first seven factors will be retained.
Initial Eigenvalues – Eigenvalues are the variances of the factors. Since we conducted our factor analysis on the correlation matrix, the variables are standardized, which means that each variable has a variance of 1, and the total variance is equal to the number of variables used in the analysis; in this case 20.
% of Variance - This column contains the percent of total variance accounted for by each factor. The top factor contributes for 19.6% and second factor contributes for 15% of the variation.
Cumulative % - This column contains the cumulative percentage of variance accounted for by the current and all preceding factors. The first 4 factors contribute for 54% and first five factors contribute for 60% of the variance.
Rotation Sums of Squared Loadings - The values in this column of the table represent the distribution of the variance after the varimax rotation. Varimax rotation tries to maximize the variance of each of the factors, so that the total amount of variance accounted for is redistributed over the seven extracted factors.
Conclusion from Factor Analysis: Identifying Factors
As expected, nothing more important as the fundamentals of a firm influence an investing decision. This factor includes key basics of the company like – Revenues, Profits, Book Value & Order Book among others. Hence an investor, if sure about fundamentals of the firm, will most probably put his/her money, and will not be influenced by other factors.
“ Goodwill & Social Incentive Influence” – Factor 2
The second influencing factor is the Corporate Social Responsibility & Ethics practiced in the firm. This is the factor which makes companies like Tata Sons and GE get all the market capitalization they get. It’s good to know that many investors will choose a ‘nice’ firm even if they have to compromise on some of their profits.
The third influencing factor is concerned with what people around the investor say. In everyday life, we tend to buy things depending on what our parents, friends or peers say/ want us to buy. Investing in shares is a similar case! However, this would be the case for new and inexperienced investors.
The forth important factor influencing investor decision is the publically available information, which also includes speculations. The vision and speeches of the founder or CEO, comments of news experts on a firm and prevailing market sentiments influence the investor decision to a large extend. Investors who do not evaluate the firm and are mostly involved in technical trading are influenced by this factor.
The other factors seem to be too fractured to explain any meaningful and substantial factor.</li></ul>Cluster Analysis<br />We have considered four variables/ factors and sixty respondents for the purpose of Cluster Analysis. The factors are as follows:-<br />1. Individual Perspective<br />2. Public Perspective <br />3. Acquaintance Perspective<br />4. Fundamental Perspective<br />We carried Cluster Analysis on SPSS software. Based on the Dendogram output, we classify the sample into three clusters.<br /><ul><li>Cluster 1:
Average Scores for the Variables:</li></ul>1. Individual Perspective16.22. Public Perspective 17.23. Acquaintance Perspective15.54. Fundamental Perspective18.1<br /><ul><li>Descriptive statistics for cluster 1:
Cluster 2</li></ul>Total Number of Respondents included: 25<br /><ul><li>Average scores for the Variables:</li></ul>1. Individual Perspective14.62. Public Perspective 16.13. Acquaintance Perspective14.84. Fundamental Perspective19.3<br />Descriptive statistics for Cluster 2:<br /><ul><li>Cluster 3:</li></ul> Total Number of Respondents included = 13<br /> Average Scores of the Variables:<br />1. Individual Perspective16.72. Public Perspective 16.73. Acquaintance Perspective15.54. Fundamental Perspective18.5<br />Descriptive statistics for Cluster 3:<br />Conclusions from Cluster Analysis<br /><ul><li>Cluster 2 has the highest score for the ‘fundamental variables’ like Revenues, Profits, Book Value etc. It is clear from the descriptive statistics that this cluster is dominated by Non- Traders.
Hence people with no trading experience consider the fundamentals of the company as most important while investing money. One rationale for this can be that as a person gains trading experience, he/ she finds that the markets are driven more by sentiments than by fundamentals.
Cluster 3 has the highest average value for the ‘individual perspective’ like Ethics of the Firm, Corporate Social Responsibility and Product Affinity. It is observed from the descriptive statistics that cluster 3 has highest number of female respondents.
Hence female respondents are more influenced by the goodwill of the company, its products and social incentives, than what male respondents are influenced by.</li></ul>Appendix 1: The Questionnaire<br />Investor Behaviour<br />Top of Form<br />Age *<br />Gender * <br />Do you have any prior trading/ investment experience? * <br />1. What influence do the following factors have in your investment decision?<br />Individual perspective<br />1a. Product affinity/ aversion (eg. liquor / tobacco)<br />12345Least influencedMost influenced<br />1b. Ethics of the firm (eg: TATA)<br />12345Least influencedMost influenced<br />1c. Socially responsible firm (eg: Toyota Green initiative)<br />12345Least influencedMost influenced<br />1d. Charisma of the leader (eg: Mr. Ratan Tata, Mr. Azim Premzi, Mr. K.M.Birla)<br />12345Least influencedMost influenced<br />1e. National/ Regional Bias (affinity to Indian company over MNC)<br />12345Least influencedMost influenced<br />2. What influence do the following factors have in your investment decision?<br />Public Perspective<br />2a. Highlighted Stocks in News/ Print media<br />12345Least influencedMost influenced<br />2b. Expert comments of Media Analyst<br />12345Least influencedMost influenced<br />2c. Frequency of advertisement of product/ service on TV/ internet<br />12345Least influencedMost influenced<br />2d. Invest in government priority sector (eg: agriculture. alternative energy)<br />12345Least influencedMost influenced<br />2e. Influenced by prevailing sentiments in market/ investor community<br />12345Least influencedMost influenced<br />3. To what extend do advice/ recommendations from the following affect your investment decision?<br />Acquaintance Perspective<br />3a. Broker<br />12345Never affectsAlways affects<br />3b. Parents<br />12345Never affectsAlways affects<br />3c. Spouse<br />12345Never affectsAlways affects<br />3d. Peers/ Colleagues<br />12345Never affectsAlways affects<br />3e. Friends<br />12345Never affectsAlways affects<br />4. To what extend do you consider the following market fundamentals before investing?<br />Fundamental perspective<br />4a. Revenues/ Profit of the firm<br />12345Never considerAlways consider<br />4b. Book value of the firm<br />12345Never considerAlways consider<br />4c. Earnings per share of the firm<br />12345Never considerAlways consider<br />4d. Price Earnings ratio of the firm<br />12345Never considerAlways consider<br />4e. Order book/ future projects in hand<br />12345Never considerAlways consider<br />Bottom of Form<br />Appendix 2: Factor Analysis<br />Descriptive StatisticsMeanStd. DeviationAnalysis Nv12.581.29360v23.581.03060v33.331.11560v43.671.05260v52.501.06660v63.37.99160v73.67.79560v83.07.88060v92.931.16360v103.55.87260v113.27.91860v123.121.07560v132.851.11760v142.98.98360v153.12.97660v163.90.83860v173.57.87160v183.82.87360v193.90.75260v203.78.99360<br />KMO and Bartlett's TestKaiser-Meyer-Olkin Measure of Sampling Adequacy..595Bartlett's Test of SphericityApprox. Chi-Square432.030df190Sig..000<br />Rotated Component MatrixaComponent1234567v1.717v2.824v3.704v4.464.525v5.717v6.576.484v7.867v8.849v9.571v10.669v11.760v12.427v13.510v14.807v15.743v16.760v17.779v18.802v19.796v20.667Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.a. Rotation converged in 15 iterations.<br />Appendix 2: Cluster Analysis<br /> C A S E 0 5 10 15 20 25 Label Num +---------+---------+---------+---------+---------+<br /> 48 ─┐<br /> 59 ─┤<br /> 6 ─┤<br /> 27 ─┤<br /> 2 ─┼─┐<br /> 44 ─┤ │<br /> 46 ─┤ │<br /> 47 ─┤ ├───┐<br /> 39 ─┤ │ │<br /> 54 ─┘ │ │<br /> 18 ─┐ │ │<br /> 57 ─┼─┘ │<br /> 50 ─┘ ├─────────────────────────┐<br /> 33 ─┐ │ │<br /> 49 ─┤ │ │<br /> 29 ─┤ │ │<br /> 5 ─┼─┐ │ │<br /> 9 ─┘ ├───┘ │<br /> 14 ─┐ │ │<br /> 45 ─┼─┘ │<br /> 3 ─┘ ├───────────────┐<br /> 1 ─┐ │ │<br /> 12 ─┼─┐ │ │<br /> 19 ─┘ │ │ │<br /> 15 ─┐ ├─────┐ │ │<br /> 32 ─┤ │ │ │ │<br /> 31 ─┤ │ │ │ │<br /> 41 ─┼─┘ │ │ │<br /> 25 ─┤ │ │ │<br /> 34 ─┤ ├───────────────────────┘ │<br /> 38 ─┘ │ │<br /> 21 ─┐ │ │<br /> 42 ─┼───┐ │ │<br /> 26 ─┤ │ │ │<br /> 28 ─┘ │ │ │<br /> 7 ─┐ ├───┘ │<br /> 17 ─┼─┐ │ │<br /> 24 ─┤ │ │ │<br /> 37 ─┤ │ │ │<br /> 11 ─┤ ├─┘ │<br /> 13 ─┘ │ │<br /> 22 ─┐ │ │<br /> 30 ─┼─┘ │<br /> 35 ─┤ │<br /> 52 ─┤ │<br /> 8 ─┘ │<br /> 55 ─┐ │<br /> 56 ─┼───┐ │<br /> 58 ─┘ ├─────┐ │<br /> 40 ─┬───┘ │ │<br /> 51 ─┘ │ │<br /> 20 ─┐ ├─────────────────────────────────────┘<br /> 23 ─┤ │<br /> 16 ─┼───┐ │<br /> 36 ─┘ │ │<br /> 10 ─┐ ├─────┘<br /> 43 ─┤ │<br /> 4 ─┼───┘<br /> 53 ─┘<br />