Factor affect individual investor behavior in viet nam luận văn thạc sĩ

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FACTORS AFFECT INDIVIDUAL INVESTOR BEHAVIOR IN VIETNAM STOCK MARKET CASE STUDY: HO CHI MINH STOCK EXCHANGE (SUMMARY) A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE NHU HAl LONG Academic Supervisor: Dr CAO HAO THI HO CHI MINH CITY, JULY 2009 Table Of Contents Abstract 1 Introduction Literature review 2.1 Prospect Theory 2.2 Heuristics 2.3 Demographic Characteristics oflndividual Investor 2.4 Empirical Studies 2.5 Conceptual Framework Research Methodology 3.1 Research Design 3.2 Measurement 3.3 Pilot Survey 11 3.4 Survey Design 12 Data Analysis and Empirical Findings 12 4.1 Satnple 4.2 Descriptive Statistics 4.3 Reliability Analysis ~ 4.4 Factor Analysis 4.5 Hierarchical Regression Analysis 4.6 Hypothesis Testing 12 12 12 13 15 16 Conclusions and Recommendations 16 5.1 Main Findings 5.2 Implications 5.3 Recommendations 5.4 Limitations 5.5 Future Research Directions 16 17 17 19 19 References 20 Abstract The objectives of this research are to determine the main factors influencing individual investor behavior, to determine the relationship between factors and behavior of individual investors The scope of the research is limited to individual investor in Ho Chi Minh City The results indicated that jive factors including Information disclosed by listed company, Information from professional organization/institution, Rumor information, Information from inside company, and Herd behavior demonstrate a significant influence upon individual investor behavior The hypothesis testing results indicated that most hypotheses in the conceptual framework were supported except the influence of individual demographic characteristics on individual investor behavior Introduction The first securities trading center of Vietnam stock market (VSM) was launched in July 2000 in Ho Chi Minh City as a pilot project The second securities trading center was established in Hanoi five years later in March 2005 Till December 31st, 2008, there had been 170 stocks listed on Ho Chi Minh stock exchange (HoSE) with total capitalization value of VND169,346 billions, 168 stocks listed on Hanoi securities trading center (HaSTC) with total capitalization value ofVND50,428 billions Most investors still keep in mind a lesson they had learnt when the market index had trotted up to peak at 571.04 points on July 61h, 2001 until it had quickly collapsed to the trough of below 130 points As a result of this, many investors who just shortly before were making massive profits had ended up with huge debts Another similar event did occur in 2006, during which VN-Index had achieved at 632.69 points, which is far higher than previous record of 571.04 points, until it had kept dropping down constantly and finally maintained at around below 400 points in March, 2006 Within two months, investors had seen a quick unexpected change and failed to react effectively I Bao cao phan tich nen kinh t6 VietNam 2008 va thj tnrang chfrng khoan 2009 (Vietnam economy in 2008 and stock exchanges in 2009 analysis report) Retrieved Feb 201\ 2009 from: http://www.fpts.com.vn/FileStore/File/2009/01/25/Bao_cao_nam_2008-FPTS.pdf The instability of VSM that had been witnessed in the two cited periods above is particularly due to the impact of the so-called "psychological element" on individual investors - investors usually follow exactly any move of majority Vietnamese investors not only lack information about the market, but also they are in short of experience Basically, they base their trading activities on those of majority It is easy to see that VSM did not operate under any economic rules; theories of market efficiency completely fail Perhaps, this is the time to use the theory based on basic human psychology to explain the behavior of investor in VSM Based on the above background, this research focuses on the following objectives: • To determine the main factors influencing individual investor behavior • To determine the relationship between factors and behavior of individual investors • To suggest recommendations for policy markers, listed company, and individual investors Descriptive statistics are firstly used to describe the basic features of the data in this research; secondly, this research using qualitative study to explore potential factors which may have an impact on the decision making of the individual investor Finally, quantitative study measures the decision making of individual investor and factors that have identified The statistic software used in this research is SPSS 15.0 The respondents in this research consist of individual investors who had trading account at securities company in Ho Chi Minh City Literature review Decision-making is a complex process Decisions can never be made by just relying on the personal resources and complex models, which not take into consideration the situation Decision-making can be defined as the process of choosing a particular alternative from a number of alternatives It is an activity that follows after proper evaluation of all the alternatives They need to update themselves in multidimensional fields so that they can accomplish the desired results/ goals in the competitive business environment In the present of Vietnam stock market situation, behavioral finance is becoming an integral part of the decision-making process, because it heavily influences investors' performance They can improve their performance by recognizing the biases and errors of judgment to which all of us are prone Behavioral finance deals with individuals and ways of gathering and using information Besides, behavioral finance seeks to understand psychological decision processes In addition, it focuses on the application of psychological and economic principles for the improvement of financial decisionmaking According to behavioral finance, investor behavior derives from psychological principles of decision making to explain why people buy or sell stocks Behavioral finance focuses upon how investors interpret and act on information to make investment decisions This research based on the basic findings and principal theories within behavioral finance in order to explain the psychologies of various irrational investor behaviors in stock market, which lead to the hypotheses of this research 2.1 Prospect Theory Value Figure Prospect theory value function (Source: Kahneman, D., & Tversky, A (1979) Prospect theory: An analysis of decision making under risk Econometrica, 47(2), 263-291) Prospect theory was developed by Kahneman and Tversky (1979) as a psychologically realistic alternative to expected utility theory It allows one to describe how people make choices in situations where they have to decide between alternatives that involve risk, in particular, choices under risk are usually underweighted in comparison with outcomes under certainty The tendency mentioned will lead to a pervasive effect of aversion to risk when provided sure gains while risk seeking involving sure losses The phenomenon can be simply described in S-shaped value function as Figure 2.2 Heuristics Heuristics is the decision process by which the investors find things out for themselves, usually by trial and error, lead to the development of rules of thumb In other words, it refers to rules of thumb which humans use to made decisions in complex, uncertain environments According to Fromlet (200 1), heuristics can also be defined as the "use of experience and practical efforts to answer questions or to improve performance" Due to the fact that more and more information is spread faster and faster, life for decision-makers in financial markets has become more complicated Heuristics may help to explain why the market sometimes acts in an irrational manner The following will introduce a number of heuristics of investor psychology that affect investor decision-making 2.2.1 Herd Behavior According to Chan (2003 ), herd behavior may be the most generally recognized observation on financial markets in a psychological context In addition, according to Black (1986), investors with no access to insider information, irrationally act on noise as if it were information that would give them an edge The first hypothesis of this research is proposed: H 1: Herd behavior have an impact on individual investor behavior 2.2.2 Overconfidence Investors are usually overconfident about their abilities to complete difficult tasks successfully, such as picking winning stocks They believe their knowledge is more accurate than it really is and that their forecasts are more precise than their experience should validate Several factors contribute to overconfidence One of these factors, called the illusion of knowledge, is having more information available Increased levels of information not necessarily lead to greater knowledge because many investors may not have the training, experience, or skills to interpret this information Also, investors tend to interpret new information as confirmation of their prior beliefs Daniel et al (1998) offer a theory is that stock prices overreact to private information and under-react to public information Besides, according to Odean (1998), overconfident traders believe their private information to be more precise than it is From these ideas, it can be consider that the decision making of individual investor affected by private and public information • Private Information According to Merton (1987), individual investors tend to hold only a few different common stocks in their portfolios Economist argues that individual investors hold only a few different common stocks in their portfolios because they have insider information of the company which stock they are holding In addition, Damodaran et al (1993) proved that insider trading is motivated by private information Besides, in the present, insider trading is also taking place in the Vietnam stock market; some investors rely on the relationship with someone who has responsibility in the listed company to capture the information, which is not announced outside yet, to implement buying/selling this stock The following hypothesis is proposed: H2 : Information from inside company (insider information) have an impact on the individual investor behavior • Public Information According to French el al (1986), public information is information that becomes known at the same time and available to the whole market, no one trades on the information before it is released In the present of Vietnam stock market, public information can be come from different source, such as: rumor information, information disclosed by listed company, information from professional organization/institution Rumor information According to Schindler (2007), a rumor is a piece of information that has poor authenticating data, not yet been confirmed by official sources or denied by them A rumor can either be confirmed as true or be found to be false at a certain point in the future In the present of Vietnam stock market, there are many types of rumor that could influence the stock market The following hypothesis is proposed: H : Rumor information have an impact on the individual investor behavior Information disclosed by listed company Information disclosed by listed company Is the information about the company financial performance, board of director, future project, and stock trading of member in board of director This information must be disclosed to the public through the media, such as: newspaper, television, or the website of the company The following hypothesis is proposed: H 4: Information disclosed by listed company have an impact on the individual investor behavior Information from professional organization/institution Information from professional organization/institution is the information announces to the public through by the media This information source is come from investment funds, specialized magazines, or from the report of prestigious organization/institution (i.e report ofHSBC, JP Morgan, and Merrill Lynch about Vietnam stock market) This source of information has an important for individual investors when they make decision to buy or sell stocks When a good analyzed report about stock market announces, this will take investors to buy stock, and in the other hand, they will sell stock The following hypothesis is proposed: H : Information from professional organization/institution have an impact on the individual investor behavior 2.3 Demographic Characteristics of Individual Investor Grinblatt et al (2001) found influence of several demographics (age and gender) on the propensity to buy stocks Besides, according to Westernholm el al (2003), male investors trade more frequently and are more diversified than female investors In addition, according to Chen et al (2005), an experienced trader may be less inclined toward behavioral biases in their trading decisions The following hypothesis is proposed: H : The relationship between factors and individual investor behavior will be significantly influenced by the factors related to demographic characteristics 2.4 Empirical Studies 2.4.1 Andre Farber, Nguyen Van Nam, and Vuong Quan Hoang (2006) The question about the herd behavior on Vietnam stock market was firstly asked in the early of 2001, and it have experimental demonstrated in 2006 Farber et al (2006) proved that herd behavior is very strong in Vietnam by statistic model They have checked the effect of herd behavior on the market return Results of their study for Vietnam stock market are: investors behave in herd when the market situation forces the stocks to extreme positive returns; herd behaviors exist on the Vietnam stock market 2.4.2 Robert A Nagy and Robert W Obenberger (1994) Nagy and Obenberger (1994) using the varimax algorithm of orthogonal rotation to analyzed 34 variables that presented by seven summary factors, such as: neutral information, accounting information, self-image/firm-image coincidence, classic, social-relevance, advocate-recommendation, and personal financial needs Their findings suggest that the recommendations of brokerage houses, individual stock brokers, family members and coworkers go largely unheeded Many individual investors discount the benefits of valuation models when evaluating stocks 2.4.3 John R Nofsinger (2001) Nofsinger (200 1) investigate the trading behavior of investors by developing a measure of abnormal trading and using the buy and sell volume of institutions and individuals around firm-specific news releases in the Wall Street Journal and macro-economic announcements He found that investors conduct heavy trading around the publication of firm-specific news in general, and earnings, dividend, and capital budgeting news in particular 2.4.5 Clara Vega (2006) Vega (2006) measured the effect of private and public information on the post-earning announcement drift The empirical results show that the more information (private or public) investors have about the true value of an asset, and the more they agree and trade on this information-the smaller the abnormal return drift 2.5 Conceptual Framework In this research, the conceptual framework is illustrated in Figure Moderator variables Antecedent variables Demographic characteristics of individual investor: • Age • Gender • Investment experienced Public information • Rumor information • Information disclosed by listed company • Information from professional organization/institution Private information • Information from Inside Company (insider information) Outcome variable Individual Investor Behavior Herd behavior Figure Conceptual Framework Research Methodology 3.1 Research Design The research design of this research comprises three main steps as illustrated in Figure Ly thuy~t tri~n VQng duqc phat tri~n b6'i Kahneman va Tversky (1979), n6 mo ta lam th~ nao nguai h,ra ch9n nhi€u tinh hu6ng rna h9 phai quy~t dinh gifra cac phuang an c6 nH ro, C\1 the, hQ quan tam qua nhi€u vao vi~c lam th~ nao de tranh thi~t h~i chu khong h€ quan t6'i vi~c lam de tang them lqi ich Khuynh huang vira d€ c~p se dftn d~n m Cronbach's alpha theo thu tv tir 0,773 d~n 0,610 Nhan tf> hanh vi nha d~u tu ca nhan c6 h~ s6 Cronbach's alpha la 0,638 4.4 Phan tich nhan tfi Phan tich nhan t6 duqc Slr dvng d~ rut tir 20 bi~n quan sat ban d~u nhung nhan t6 c6 y nghia han Phan tich nh~n d~ng duqc nh6m nhan t6 v6'i eigenvalue 16'n han 1, phuang sai trich d~t 60,481 %; va m(>t nh6m nhan t6 duqc rut cua hanh vi nha d~u tu 12 ca nhan v6i eigenvalue 16n han 1, phuang sai trich d~t 59,131% K~t qua cua phan tich nhan t6 duqc trinh bay a Bang va Bang Bang Phan tich nhan t6 cua cac nhan t6 thong tin Nhan t6 1: Hanh vi bliy dan Nhan t6 2: Thong tin n9ib9 Nhan t6 3: Thong tin ttl' cong ty niem y8t Nhan t6 4: Thong tin tir cac t6 ch(rc chuyen Nhan t6 5: Tin d6n nghi~p Herd2 Herd4 Herd3 Herd1 HerdS Insider2 Insiderl Insider3 Com Dis2 Com Dis3 Com Dis1 Pro_Org2 Pro_Org4 Pro_Org3 Pro Org1 Rumorl Rumor2 Eigenvalues Phuo·ng sai trich (%) Liiy k8 phuO"ng sai trfch (%) 785 729 701 665 636 828 762 682 821 807 790 739 669 639 626 4.277 15.693 15.693 2.112 12.488 28.181 1.507 12.371 40.552 1.302 11.709 52.261 732 587 1.085 8.221 60.481 Bang Phan tich nhan t6 Hanh vi nha dfru tu ca nhan Nhan t6 1: Hanh vi nha dliu tu ca nhan Behav2 858 Behav1 766 Behav3 672 Eigenvalues 1.774 Phuo·ng sai trich (%) 59.131 Liiy k8 plmm1g sai trfch (%) 59.131 Trong k~t qua phan tich nhan t6, h~ s6 KMO cua nhan t6 thong tin la 0,733 va h~ s6 KMO cua hanh vi nha dfru tu la 0,583 Muc y nghia cua ki€m dinh Bartlett la 0,0000 13 4.5 Phan tich hfii quy theo thrr tl}' (Hierarchical Regression Analysis) Hai mo hinh hfli quy da duqc phat tri~n, d~u tien la mo hinh v6i nam nhan t6 thong tin Mo hinh duqc them vao ba d~c di~m ca nhan cua nha d~u tu nhu la biSn gh't KSt qua cua phan tich duqc th~ hi~n a Bang Bang Phan tich hfli quy cua Hanh vi nha d~u tu ca nhan Bi~n Mo hinh s6 Bi€n ph\1 thui b(> X3 : Thong tin ttr cong ty niem ySt X4 : Thong tin tir cac t6 chuc chuyen nghi~p 14 ., X5 : Tin d6n 4.6 Ki~m djnh ghi thi~t Tfmg c()ng s{m gia thitit da duqc d~ d~ ki~m tra m6i quan h~ cua cac nhan t6 d6i v6i hanh vi nha dciu tu ca nhan Ktit qua ki~m dinh nhan t6 duqc trinh bay Bang Bang Tom t~t ki~m dinh gia thitit Gia thi~t K~t qua ki~m djnh gia thiM Mo ta H1 Hl'mh vi bity dan c6 t:k d()ng d~n hanh vi nha ditu tu ca nhan H2 Thong tin n