The factors influencing individual investor''''s behavior in Vietnam Stock Exchange

Foreign investors might also need to know the most influencing factors on the Vietnamese investor’s behavior because they are allowed to hold shares of the Vietnamese listed companies an

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

Acknowledgement

This research project would not have been possible without the support of many people Firstly I wish to express my deep sincere gratitude to my supervisor, Dr Vo Thi Quy for her invaluable advices and helps Without her, this thesis could not have been completed

I would like to express my deepest gratitude and honor to my dear parents for not only the love they devote to me but also for the time I took from them which should have been my devotion to them in their aged time

Special thanks to my wife’s assistance in this study She has encouraged me and helped me in English editing

My thanks would also go to all of my colleagues from Nguyen Tat Thanh college, my classmates, especially, Lam Hong Phong, Nguyen Thanh Trung and Ms Dang Hai Yen, Ms Nguyen Nhu Chang for all of their friendship and encouragement

Finally, I also wish to thank my friends in Ocean Security, Dai A Security, Nhat Viet Security, Vietcombank, HSBC, National university… for their great support My thanks would also go to the respondents, without them, my thesis could not have been done

Abstract

This paper aimed at identifying the most and the least influencing factors on the Vietnamese investor’s behavior Base on Al-Tamimi’s questionnaire, this research developed a modified questionnaire The questionnaire included thirty items that belong to five categories: self-image/firm-image co-incidence, accounting information, neutral information, advocate recommendations, personal financial needs

This study was carried out in 226 individual investors in Hochiminh stock exchange The results showed that Vietnamese individual investors select stock base on some factors The most interested factors were Condition of financial statements, Expected corporate earnings, Expected profit from stock, Reputation of the firm, Fluctuation/developments in the VN stock index, Government's policy (tax, monetary, interest rate), Current economic indicators (such as GDP, inflation ), Affordable share price, Firm status in industry, Expected dividends The least factors were related to advocate recommendations such as Self-company recommendation, Friend or family member opinions, Opinions of the firm’s stockholders, Broker recommendation, specialist recommendation, and Security company’s recommendations Factors namely Fluctuation of gold's price, Minimizing risk, Fluctuation of dollars' price, Feelings for a firm's products and services, Reputation of the firm's shareholders or leader are also the least influencing factors on investor’s behavior

Key word: individual investor’s behavior

TABLE OF CONTENT

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Chapter 1: 0INTRODUCTION

1.1 Introduction 1page 1 1.2 Research background 2page 1 1.3 Problem statement .3page 3 1.4 Research objective .4page 3 1.5 Scope and methodology of the study page 3 1.6 Contribution page 4 1.7 5Structure of the study page 4

Chapter 2: 6LITERATURE REVIEW

2.1 Introduction 7page 6 2.2 Some of related theory .8page 6

2.2.1 The concept of investors page 6 2.2.2 Security Selection: the Treynor-Black model page 7 2.2.3 Security analysis page 8 2.2.4 Technical analysis and Fundamental analysis .page 13 2.3 Previous researches 9page 15

1 02.4 Research question page 25

1 12.5 Conclusion page 25

Chapter 3: METHODOLOGY

3.2 Research design .page 26 3.3 Develop questionnaire page 29 3.4 Pilot test page 31 3.5 Main survey page 32 3.6 1 3 Conclusion page 34

Chapter 4: DATA ANALYSIS AND FINDINGS

1 44.1 Introduction page 35

1 54.2 Descriptions of sample page 35

1 64.3 Exploratory factor analysis (EFA) .page 37

1 74.4 Reliability testing page 40

1 84.5 The most and the least factors influence on investor’s behavior page 42

1 94.5.1 Effect of 8 groups of variables on investor’s behavior page 42

2 04.5.2 Effect of separate variables on investor’s behavior page 48

2 14.6 Conclusion page 53

Chapter 5: CONCLUSIONS AND IMPLICATIONS

2 25.1 Introduction page 56

2 35.2 Summary of the study .page 57

2 45.3 Implications of this study page 58 5.4 Conclusions of this study .page 61

2 55.5 Limitations and recommendations for further research page 61

LIST OF REFERENCES page 62

Appendix 1 – Questionnaire (Vietnamese version) page 65

Appendix 2 – Observed variables page 68

Appendix 3 - Descriptive Statistics of variables page 69

2 6Appendix 4 – Compare mean of variables page 70

LIST OF FIGURES

2 7Figure 1.1 Outline of chapter 1 page 1

2 8Figure 1.2 Structure of the study page 5

2 9Figure 2.1 The structure of Chapter 2 page 6

3 0Figure 3.1 Outline of chapter 3 page 26

3 1Figure 3.2 Research process page 28

3 2Figure 4.1 Outline of chapter 3 page 35

3 3Figure 5.1 – Outline of chapter 5 page 56

Table 4.4: Reliability of the measurement instrument page 40

Table 4.5: Frequency Distribution of Variables that Significantly Influence the Vietnamese behavior page 43

Table 4.6: Multiple Comparisons of groups page 47

Table 4.7: Descriptive Statistics of variables page 49

Table 4.8: The most influencing factors on Vietnamese investor’s behavior page 51

Table 4.9: The least influencing factors on Vietnamese investor’s behavior page51

Table 4.10: The most influencing factors in this research, Nagy, Merikas and Tamimi page 52

Table 4.11: The least influencing factors in this research, Nagy, Merikas and Tamimi page 55

Al-2Chapter 1: INTRODUCTION

91.1 Introduction

This chapter portrays general introduction for the current study with which research problem, research objectives and research questions are provided as the rationale for this study An introduction to the research methodology to be used and the scope of the study is also addressed in this chapter At the end of the chapter, the structure of this study is provided The Outline of this chapter is shown in figure 1.1

4 5Figure 1.1 Outline of chapter 1

1 01.2 Research background

The Vietnam Stock Exchange (VSE) was established in 2000 At that time, trading in the stock market was operated only at the HoChiMinh Stock Exchange

1.1 Introduction 1.2 Research background 1.3 Problem statement 1.4 Research objectives 1.5 Scope and Methodology 1.6 Contribution 1.7 Structure of the study

listed, Refrigeration Electrical Engineering Joint Stock Corporation (‘REE’) and Saigon Cable and Telecommunication Material Joint Stock Company (‘SACOM’) Until 2005, there were only 41 equities issues listed During that period VN index fluctuated erratically, sometime it raised up to nearly 600 score sometime it fell down nearly 100

As of 2006, particularly in end-year half, quantity of listed companied increased quickly, 196 companies were listed at the end of 2006 In total there were thirteen licensed securities companies Along with rising of listed companies, VN index increased continuously from 600 in middle to nearly 1000 at the end of 2006 Not stop

at that point, with the event that Vietnam joined to WTO at the end of 2006, the stock market really broke out The market was hot continuously regardless of the warning of experts and pinnacle of VN index was 1170 on 13/03/2007

There had been 249 companies listed on stock market until 2007 Of these, 138 are at HOSE, left ones are at Hanoi Stock Exchange (HNX) With 249 being listed, market capitalization is about 491 billions VND, equivalent to 30 billion US dollars Comparing Vietnam market capitalization to other stock markets of developed countries, perhaps Vietnam market is not worth considering However, 30 billion US dollars market capitalization is equivalent to 43% GDP of the whole nation that would

be significant to Vietnam

Over 9 years of establishment and development, in general, the market has positive contribution The Vietnamese Stock market have experience strong fluctuation: from over 1100 on 13/03/2007 down to over 250 point in the beginning of

2008 During this time, at the cheapest (over 250 point), some investors are hesitant to buy stock but at the highest (over 1100 point), some investors fight to buy stock So what make investors buy and/or sell stock? Which factors influence investor’s

1 11.3 Problem statement

Vietnam security market had the highest growth rate in the Asia Pacific in 2006 with 145%, even higher than Sanghai security market with 130% growth rate And at early 2007, VN security market continuously increased with 46% - the highest growth rate in the world This fierce increase of VN market made shock to not only many domestic investors but also security experts including market control officers Along with this, the worry about risk of forming buble in the security market had been a controversial topic

A lot of reasons had been made to explain too hot development of VN security maket Domestic investors blamed for foreign investors, foreign investors blamed for domestic investors’ “craziness” However, in general most of people supposed that main reason was “herd psyshology behavior”, crowd psychology investment of domestic investors –lack of knowledge and personal expectation (3 4http://www.saga.vn/view.aspx?id=2953) Is it right? So what factors affect on Vietnamese individual investors’ behavior?

1 21.4 Research objective

The purpose of this study is examining the most and the least influencing factors on the Vietnamese individual investors’ behavior

1 31.5 Scope and methodology of the study

1.5.1 Scope of the study

The Ho Chi Minh Stock Exchange have more listed company and trading volume than 35Hanoi Stock Exchange, so my study just focuses on individual investors

at the Ho Chi Minh City Securities Center Therefore they may not represent for all individual investors in Vietnamese Stock Exchange

This study was conducted with two phases: a pilot test and the main study In the first phase, a qualitative approach was employed in order to explore whether the scale for measuring the constructs of factors influencing individual investor’s behavior

in HOSE Some amendments have been made where needed This step was carried out

by using group discussion techniques

A quantitative approach was then used in the second phase Data was collected

by interviewing individual investors at several Securities Companies The purpose of this phase was to re-assess the reliability of the measurement scales using Cronbach alpha coefficient and Exploratory Factor Analysis (EFA) SPSS software version 16.0 was used for data analysis Chapter 3 will discuss the methodology for this study in more detail

1 41.6 Contribution

The study is important for individual investors, companies listed in Vietnamese Stock market For both local and international investors, the factors influencing on individual investor’s behavior is the most important because this would affect their profit in future Foreign investors might also need to know the most influencing factors

on the Vietnamese investor’s behavior because they are allowed to hold shares of the Vietnamese listed companies and they invest in Vietnamese stock Market For companies, identifying the most influencing factors on individual investor’s behavior would affect their future policies and strategies Finally, for government, identifying the most influencing on individual investor’s behavior would affect legislations and the additional procedures needed in order to satisfy investors’ desires and also to give more support to market efficiency

1 51.7 Structure of the study

The structure of this study is shown in figure 1.2

4 6Figure 1.2 Structure of the study

Chapter 1 Introduction Chapter 2 Literature Review Chapter 3 Methodology Chapter 4 Data analysis and Finding Chapter 5 Conclusion and implications

3Chapter 2: LITERATURE REVIEW

1 62.1 Introduction

The previous chapter introduces an overview of the study background, the rationale of the study, the research objective and the research questions These chapter searches and reviews relevant theories The aim of this review is to examine which factors influence individual investor’s behavior and that will be tested in the Ho Chi Minh Stock Exchange to answer the research questions

4 7Figure 2.1 The structure of Chapter 2

1 72.2 Some of related theory

2.2.1 The concept of investors

Institutional investor is a e3 6ntity with large 37amounts to 38invest, such as

3 9investment companies, 4 0mutual funds, 4 1brokerages, 4 2insurance companies, 4 3pension

2.1 Introduction 2.2 Some of related theory 2.3 Previous research 2.4 Research question

2.5 Conclusion

fewer protective 4 7regulations because it is assumed that they are more knowledgeable and better 4 8able to protect themselves They 49account for a 5 0majority of overall 5 1volume

Opposite institutional investor, an 5 2individual who 53purchases small 54amounts of

5 5securities for his/her own account, as opposed to an 56institutional investor, also called

5 7retail investor or 58small investor In this thesis, I just considered individual investors

2.2.2 Security Selection: the Treynor-Black model

Jack Treynor and Fischer Black (1973) developed a portfolio construction model for managers who use security analysis The investor use security analysis to construct an active portfolio

The security analyst must forecast the dividends and earnings that can be expected from the firm This is the heart of fundamental analysis, that is, the analysis

of determinants of value such as earnings prospects Ultimately, the business success of the firm determines the dividends it can pay to shareholders and the price it will command in the stock market Because the prospects of the firm are tied to those of the broader economy, however, valuation analyses must consider the business environment

in which the firm operates For some firms, macroeconomic and industry circumstances might have a greater influence on profits than the firm’s relative performance within its industry In other words, investors need to keep the big economic picture in mind

Therefore, in analyzing a firm’s prospects it often makes sense to start with the broad economic environment, examining the state of the aggregate economy and even the international economy From there, one considers the implications of the outside environment on the industry in which the firm operates Finally, the firm’s position within the industry is examined (Bodie-Kane-Marcus: Essentials of investment, page 381)

However, base on Dimitrios I Maditinos (2007), in many cases, current fundamentals-based models fail to explain the past adequately, or predict the future reliably Largely as a result of these failures, scholars have started to look beyond fundamentals to the role of other “non-fundamentalist” influences on financial and stock markets, including the approach to forecasting taken by practitioners Goodhart (1988) finds that the interplay between professional analysts who base their views on fundamental analysis and those who use the chartist approach can be the catalyst for market collapses Shiller (1989) explains excess bond and stock market volatility by

“irrational” patterns of investor behavior and suggests that technical analysis is one of the important factors that gave rise to the October 1987 international stock market crash However, despite the increasing interest in non-fundamental analysis, there is little evidence about the prevalence and importance of such techniques in practice (Lui and Mole and Mole, 1998)

To understand clearly, we will study what security analysis is, particularly what fundamental analysis is and what technical analysis is?

2.2.3 Security analysis

Security analysis is an important activity to support investment decision making In the securities investment analysis, two main methods used are fundamental analysis and technical analysis Fundamental analysis helps investors to select the appropriate portfolio structure Technical analysis help investors choose the time and stock trading strategies depending on market developments

The process of securities analysis depends on each investor’s viewpoint However, in general, investors can use the analysis process from the top down, bottom-

up analysis, or a combination of both In fact, the analysis method according to a down process is the most widely applied Process starts with analyzing the economy-

top-society and reviewing about the stock market globally and nationally, and then analyzing specific industries and finally the analyzing each company separately

2.2.3.1 The global economy

A top-down analysis of a firm’s prospects must start with the global economy The international economy might affect a firm’s export prospects, the price competition it faces from foreign competitors, or the profits it makes on investments abroad Certainly, despite the fact that the economies of most countries are linked in a global macro-economy, there is considerable variation in the economic performance across countries at any time

2.2.3.2 The domestic macro economy

The macro economy is the environment in which all firms operate In Essential

of Investment page 384, Bodie-Kane-Marcus shows that stock prices tend to rise along with earnings and ratio of stock price to earnings per share varies with factors such as interest rates, risk, inflation rates

The macroeconomic conditions needed to be concern in securities analysis are: gross domestic product (GDP), unemployment rate, inflation rate, interest rate, exchange rate, national budget deficit, government policy in the financial-monetary field However, there are three most basic macroeconomic factors impacting directly to the investment activities in stock market, such as exchange rates, interest rates and inflation rates The following analyzes their effect in detail

— Exchange rates: when the investor realizes that the domestic currency can be devaluated in the next time, the investor will decide not to invest in securities or will seek to replace the securities with foreign currency assets to prevent stock value decrease

— Inflation is the rate at which the general level of prices is rising Inflation and interest rates are two very important factors causing a great impact on investment decisions in the stock market

— Interest rates

Bodie-Kane-Marcus said that the level of interest rates is perhaps the most important macroeconomic factor to consider in one’s investment analysis Forecasts of interest rates directly affect the forecast of returns in the fixed-income market If your expectation is that rates will increase by more than the consensus view, you will want

to shy away from longer term fixed-income securities Similarly, increases in interest rates tend to be bad news for the stock market Unanticipated increases in rates generally are associated with stock market declines Thus, a superior technique to forecast rates would be of immense value to an investor attempting to determine the best asset allocation for his or her portfolio This interest rate is affected by a number

of factors:

9 The situation of production and business activities of companies: if companies operate efficiently, the demand for capital to expand production will be higher and at the same time there will be many new businesses established For this reason, demand for capital is high, thus pushing interest rates higher

9 Expenditure capacity of people: If predictions about the economy have good growth prospects, people consuming demand will be higher, so they are willing to borrow to spend, resulting in interest rates may rise

Macroeconomic environment has an important role to decide the overall trend

of the stock market Generally, when the economy is in growth phase and prosperity, the stock market will develop and vice versa when the economy is in recession and crisis phase, the market will go down

Thus, if we can predict development tendency of the economy, then we can forecast the development trend of the stock market overall However, the reality surveys have showed that the actual relationship between the economic situation and the general evolution of the stock market does not always happen the same way and if

so, they can occur under different directions and orders In reality, the stock market over the world actually showed that there have been several fast-growing periods of the economy, but the stock market has gone down and vice versa

Sometimes stock price fluctuations occur before changes in the economy, sometimes occur later So investors try to predict the economic situation to find out the peak of the economic cycle and select the time to participate or withdraw from the stock market

2.2.3.3 Government policy

Base on Bodie-Kane-Macus (Essential Investment, page 388), government policy have influent macroeconomic, especially fiscal policy and monetary policy

Fiscal policy refers to the government’s spending and tax actions and is part of

“demand-side management.” Fiscal policy is probably the most direct way either to stimulate or to slow the economy Decreases in government spending directly deflate the demand for goods and services Similarly, increases in tax rates immediately siphon income from consumers and result in fairly rapid decreases in consumption

Monetary policy refers to the manipulation of the money supply to affect the macroeconomic and is the other main leg of demand-side policy Monetary policy works largely through its impact on interest rates Increases in the money supply lower short-term interest rates, ultimately encouraging investment and consumption demand Over longer periods, however, most economists believe a higher money supply leads only to a higher price level and does not have a permanent effect on economic activity Thus, the monetary authorities face a difficult balancing act Expansionary monetary

policy probably will lower interest rates and thereby stimulate investment and some consumption demand in the short run, but these circumstances ultimately will lead only

to higher prices The stimulation/inflation trade-off is implicit in all debate over proper monetary policy

2.2.3.4 Industry analysis

Industry analysis is important for the same reason that macroeconomic analysis is: Just as it is difficult for an industry to perform well when the macroeconomic is ailing, it is unusual for a firm in a troubled industry to perform well Similarly, just as

we have seen that economic performance can vary widely across countries, performance also can vary widely across industries

At the same time, different industries will have different levels of risk; therefore

it is necessary to assess the risk level of the industries to determine corresponsive investment returns should be

Risk of each industry has not much variation over time, so we can analyze the risk level of each industry in the past to predict its risk in future

2.2.3.5 Political-social environment

Political, economic and social environment has certain impacts on the operation

of the stock market, may even affect the operation of the entire global stock market The change of tax policy, operating rates policy, and monetary policy … will impact significantly on the activities of companies

The political situation is very influential to the stock market Political factors include changes in government and political-economic activities of many countries Political change makes many regulations and government control in some sectors tightened and in other sectors loosen, resulted in a major impact on business results of each sector, each company and it is difficult to confirm the tightening or loosening will

Law environmental is also a basic factor to impact the stock market as well

Government agencies affected the stock market by law and other documents under law

For example, antimonopoly law often reduces stock price of companies subject to the

law governing Mergers and acquisitions law may impact negatively or positively to a

group of companies Therefore, the legal environment should be considered under

different angles as followings:

— The uniformity of the legal system ;

— The feasibility of the legal system ;

— The effectiveness of the legal system (enough to protect the legitimate rights of

the investor or not, encourage the trading activity or not, enough power to ensure that

securities transactions are safe?)

— The international of the legal system;

— The stability of the legal system

2.2.4 Technical analysis and Fundamental analysis

Technical analysis is based on evaluation of past prices and volume trade of the

stock Followers of technical analysis are known as chartist as they look at the past

prices of the stock and identify patterns and trends They do so to forecast through the

charts and prices what the stock will do in the future, and hoping to find pattern they

can exploit to make a profit The methodology involves studying the supply and

demand in the market to attempt what direction or trend will continue in the future As

an example of technical analysis, consider the relative strength approach The chartist

compares stock performance over a recent period to performance of the market or other

stock in the same industry (Essentials of investments – Zvi Bodie, Alex Kane, Alan

J.Marcus- page 247 to 248)

Fundamental analysis on the other hand involves valuing a company to determine

the firm, expectations of future interest rates, and risk evaluations of the firm to determine proper stock prices Fundamental analysts usually start with a study of past earning and an examination of company financial statements They supplement this analysis with further detail economic analysis, ordinarily including an evaluation of the quality of the firm’s management, the firm’s standing within its industry, and the prospects for the industry as a whole The hope is to attain some insight into the future performance of the firm that is not yet recognized by the rest of the market (Essentials

of investments – Zvi Bodie, Alex Kane, Alan J.Marcus- page 247 to 248)

With the information presented which technique technical or fundamental analysis should be used for trading or investing? Technical analysis does not consider the qualitative factors which are really important for analytical purposes Only charts, indicators and volume analysis cannot completely describe whether the stock is worth buying or not long term To gain a long term perspective, fundamental analysis is recommended as it will incorporate the information that has significant value for an investor The information contains both quantitative and qualitative research However, when going long on a security from an investment perspective technical analysis will aid your entry But, in retrospect the theory behind long term investing takes out the worry from the day to day volatility and thus fundamental analysis would weigh more important If you are looking to trade an asset short term say one day to three months, fundamental analysis does not really matter unless you are expecting some major news announcement to take place In this shorter time frame especially used for option and leveraged trading technical analysis is very useful and should be understood Understanding: price patterns, candle sticks, support and resistance, moving averages combine with volume and an idea as to what the industry group and overall market is doing from a technical aspect is necessary to picking your entries and exits (5 9http://businesstm.com/investment-traders/technical-analysis-fundamental-analysis-

whats-the-difference-the-pros-cons/- March 19, 2010 By 60Kirk Paterson - BusinessTM.com/Invement-Traders)

In summary, we can see that there are many factors to affect the securities investment All the information from publicly available information to inside enterprise information, such as the accounting information, market information, stock prices in the past, information relating to the operation of the business, all are reflected in stock prices This makes buying and selling stocks professional investors like games of luck

In stock investment theory, there are two main methods of stock analysis on which the investors base their investment options, that is fundamental and technical analysis To analyze an efficient way, then we will analyze the overall macro-economic situation such as GDP, inflation , to information about government policies (taxes, interest rates, monetary policy ), then down the information analysis of the security sector, and final review of accounting information for that stock In addition, all relevant information, even information relating to executives, leaders and policies, the development trend of that company were dissected to examine, in particular it is also of interest to both trading volume and price of shares in the past for investment decisions Thus, investing in a stock is not simple, investors will choose the factors that are important to analyze when deciding to buy or sell securities? Let's find out in the next section

1 82.3 Previous researches

Professor Kahneman found that under conditions of uncertainty, human decisions systematically depart from those predicted by standard economic theory

Kahneman, together with Amos Tversky, formulated prospect theory An alternative to

standard models, prospect theory provides a better account for observed behavior Kahneman also discovered that human judgment may take heuristic shortcuts that systematically diverge from basic principles of probability His work has inspired a

new generation of research employing insights from cognitive psychology to enrich financial and economic models

In this section, the results of some empirical studies about individual investors’ equity selection and individual investor behavior will be highlighted An attention to the individual investor behavior is the emphasis of this paper

Nagy and Obenberger (1994) examined which factors had greatest influence on the equity selection process of individual investors in USA They developed a questionnaire including 34 variables and asked 137 participants And they identified 7 relatively homogenous groups of variables that influenced equity selection process, called 7 factors, those are “neutral- information”, “accounting – information”, “self-image/ firm image coincidence”, “classic”, “social-relevance”, “advocate-recommendation”, “personal-financial-need” as illustrated in table 2.1

Their findings suggested that classical wealth – maximization criteria (expected earning, diversification needs, and risk minimization) are important to investors, even though investors employ diverse criteria when choosing stocks Contemporary concerns such as local or international operations, environmental track record and the firm’s ethical posture appear to be given only cursory consideration The recommendations of brokerage houses, individual stock brokers, family members and co-workers go largely unheeded Many individual investors discount the benefits of valuation models when evaluating stocks Almost 40% of individual investors apparently did not make use of valuation model, even one as readily available as price/earnings P/E ratio

Table 2.1: Factors influencing the equity selection process of individual investor in USA in Nagy’s research

Neutral Information Financial Press Coverage

General Press Coverage Recent Price Movements Information from Investment Advisory Services Accounting Information Financial Statements

Annual Reports Prospectuses Valuation Techniques Expected Earnings Self-Image/Firm-Image Coincidence Firm

Reputation Firm Status Feelings about Products/Services Perceived Ethics of Firm

Classic Expected Dividends

Share Price Affordability Tax Consequences Risk Minimization Social Relevance Environmental Record

Local Operations International Operations Advocate

Recommendation

Recommendations from:

Brokerage House Individual Stock Broker Friends/Coworkers Personal Financial

Needs

Competing Financial Needs Time before Funds are Needed Diversification Needs

Krishnan and Booker (2002) carried out a study on 106 MBA students in Pittsburgh University to examine the factors influencing the decisions of investors who use analysts' recommendations to arrive at a short-term decision to hold or to sell a stock Specifically they examined if the presence of analysts' recommendations reduces the tendency for investors to commit the disposition error, i.e., sell winning stocks too soon and hold losing stocks too long They also examined whether the strength of supporting arguments to the analysts' recommendations affects investor decisions Their results indicated that the presence of an analyst summary recommendation report reduces the disposition error for gains but not for losses A strong form of the analyst summary recommendation report, i.e., one with additional information supporting the analysts' position further, reduces the disposition error for gains and also reduces the disposition error for losses

Merikas et al., (2003) investigated the factors that influenced individual investor

behavior in the Greek market They mailed their questionnaire including 26 variables

to 150 individual behaviors They found that most of the variables that were rated

important were classic wealth maximization criteria such as “expected corporate

earnings”, “condition of financial statements”, or “firm status in the industry” with

more than half of the respondents considering important Apart from the wealth criteria, surprisingly more than half of the respondents considered no other factor important indicating that investors truly employed diverse decision criteria when

choosing stocks In addition, speculative factors like “get rich quick”, “recent price

movements in the firm’s stocks”, and “affordable share price” influenced only 1/3 of

the respondents Finally, environmental criteria like “coverage in the press”,

“statements from politicians and government officials”, “ease of obtaining borrowed

funds” and “political party affiliation” were either totally unimportant to most

experienced stock investors and only a very small percentage of them considers them significant investment decision criteria They also analyzed the 26 variables using the

varimax algorithm of orthogonal rotation, which is a very commonly used method of

factor analysis Evaluation of the resulting categories and rankings is highly subjective since factor analysis identifies only the homogeneous cluster groups The assignment

of the factors was undertaken by the factor analysis, however, considerable subjective judgment and common sense was also employed to clarify discrepancies They analyzed information into 5 groups: accounting information, subject/ personal, neutral information, advocate recommendation, personal financial needs (as illustrated in table 2.2) The results indicated that individuals based their stock purchase decisions on economic criteria combined with other diverse variables The results also revealed that there is a certain degree of correlation between the factors that behavioral finance theory and previous empirical evidence identify as the influencing factors for the average equity investors

Table 2.2: Factors influencing the equity process of individual investor in Greek in

Merikas’ research

Condition of financial statements Expected corporate earnings Expected dividends

Firm status in industry Affordable share price

Coverage in the press Recent price movements in a firm’s stock Statements from politicians & governmental officials Fluctuations/developments in the indices of the major markets Current economic indicators

Reputation of the firm

Neutral Information

Environmental record Brokerage house recommendation Family member opinions

Friend or coworker recommendations

Advocate

Recommendation

Opinions of the firm’s majority stockholders Diversification needs

Attractiveness of non-stock investments

Personal Financial Needs

Ease of obtaining borrowed funds

Hodge (2003) also examined whether lower perceptions of earnings quality are associated with more or less reliance on a firm's audited financial statements and fundamental analysis of those statements when making investment decisions in Securities and Exchange Commission's (SEC) He surveyed 414 individual investors His results suggested that the SEC's concerns are valid: Perceived earnings quality for all publicly traded firms has declined overtime, as has perceived auditor independence and the perceived reliability of audited financial information In contrast, the perceived relevance of audited financial information has increased In addition, results reveal that lower perceptions of earnings quality are associated with greater reliance on a firm's audited financial statements and fundamental analysis of those statements when making investment decisions This result suggests either (1) lower perceptions of earnings quality lead investors to examine more thoroughly a firm's audited financial

statements, or (2) more thorough analysis of a firm's financial statements leads investors to lower their assessments of the firm's earnings quality

Naser and Nuseibeh (2003) studied to provide empirical evidence on the usefulness of different aspects of the annual report to various Kuwaiti user groups, among them are individual investors The analyses indicated that the user groups surveyed in the study rely mainly on information made directly available by the company and didn’t not consult intermediary sources of corporate information in order

to make informative decisions The analyses also revealed that credibility and timeliness were the most important features of useful corporate information and traditional financial statements were the most important and credible parts of corporate annual reports Non-financial information, however, proved to be less credible and of less importance to the Kuwaiti user groups Overall, investors seemed mainly to use fundamental analysis and, to a lesser degree, portfolio analysis

Dimistrios, I Maditinos (2004) investigated investors’ behavior in the Athens Stock Exchange A questionnaire was developed and focused on four categories of analyses: fundamental analysis, technical analysis, portfolio analysis, and others' opinions The fourth category, others' opinions, is mainly focused on public and private opinions, information in newspapers/media, instinct/experience, foreign stock markets, government policy, etc The results indicate that individual investors rely on more on newspapers/media and the noise in the market when they making their investment decisions, while professional investor rely more on fundamental and technical analysis and less on portfolio analysis The investment horizon seems to have a direct association with the relative importance of the techniques that professionals use for stock analysis, with fundamental analysis being seen as the most important approach in the long-term, but technical analysis being key on the short-term Also, the use of specific techniques seems to have a different impact on the performance of

Kadiyala and Rau (2004) investigated investor reaction to corporate event announcements They found that investors appear to under-react to short-term information available prior to the event as well as to the information conveyed by the event itself, leading to different patterns: return continuations and return reveals, both documented in long-horizon return They found no support for the overreaction hypothesis

Al-Tamimi (2006) researched the most and the least factors influencing individual investor behavior in United Arab Emirates Financial Market He developed

a modified questionnaire including 34 items that belong to five categories: image/firm-image co-incidence, accounting information, neutral information, advocate recommendations and personal financial needs Detailed items are listed in the table 4.3 And his study conducted on 343 individual investors

self-The results are:

(i) accounting information or the classical wealth–maximization criteria is the most influencing group on the UAE investor behavior, namely “the expected earning”, “stock marketability”, “Past performance of the firm’s stock”;

“Condition of financial statements”, “Dividends paid”, “Expected Dividends” (ii) Personal Financial Needs is the least influencing group on the UAE investor behavior, namely “Expected Losses in other local investments”, “Minimizing risk”, “Expected Losses in international financial markets”, “Diversification needs”, “Attractiveness of non-stock investment”

(iii) two factors unexpectedly had the least influence on the behavior of the UAE investors’ behavior, namely “religious reasons” and the factor of “family member opinions”

Table 2.3: The factors influence on individual investor’s behavior in UAE in Tamimi’s research

Al-Categories Items

1 Religious reasons

2 Feelings for a firm’s products and services

3 Reputation of the firm’s shareholders

4 “Get rich quick”

5 Firm status in industry

6 The creation of the organized financial markets

7 Perceived ethics of firm

8 Gut feeling on the economy

9 Reputation of the firm

19 Information obtained from the internet

20 Fluctuation/developments in the stock index

21 Coverage in the press

22 Statements from government officials

23 Current economic indicators

3.Neutral

Information

24 Recent price movement in a firm’s stock

26.Family member opinions

27 Friend or coworker recommendations

Recommendation

28 Opinions of the firm’s majority stockholders

29 Attractiveness of non-stock investment

30 Diversification needs

31 Ease of obtaining borrowed funds

32 Minimizing risk 33.Expected Losses in international financial markets

5.Personal

Financial Needs

34 Expected Losses in other local investments

Greg Mardyla and Ryoko Wada (2008) conducted a novel virtual stock market experiment that aims to investigate links between public information and short-term investment behavior at the individual decision-making level In particular, they focused

on individual investors’ trading strategies in response to three types of public information– about prices, macroeconomic news, and relevant individual-stock information The distinguishing feature of their experiment is the use of factual contemporaneous news items directly related to the stocks in subjects’ portfolios Their main finding was that in a substantial majority of cases, the subjects adhered to positive feedback trading strategies Also, when using stock price index data, the subjects predominantly followed the index, i.e buy after an increase in its value and sell after a decline

In summary, there have been several studies to investigate factors influencing individual behaviors at different markets Although there are some minor differences, these factors can be categorized as self-image/firm-image, accounting information, neutral information, advocate recommendation, personal financial needs The main findings of the above studies can be summarized as follows:

1 Classical wealth – maximimization criteria or accounting information are important to investors

2 The recommendations of brokerage houses, individual stock brokers, family members and co-workers go largely unheeded

3 Investors exhibit a strong demand for information about product safety and quality, and about the company's environmental activities

1 92.4 Research question

This study intends to answer the following questions:

• What are the most and the least factors influencing on Vietnamese individual investors’ behavior?

2 02.5 Conclusion

This chapter provides theoretical framework for the research and related previous researches There is many factors influencing investor’s behavior As in above discussion, those factors can be categorized into 5 groups: self-image/firm-image, accounting information, neutral information, advocate recommendation, personal financial needs The researcher assumes that there should be some adjustments of the measurement scale in order to make the research more suitable for the stock market in Vietnam Chapter 3 will discuss this matter in more details

3.1 Introduction 3.2 Research design 3.3 Develop questionnaire 3.4 Pilot test 3.5 Main study 3.6 Conclusion

To measure the factors influencing individual’s behavior constructs, the current study employs a descriptive method This method was chosen because it allows the researcher to describe the investor’s attitude towards factors influencing their behavior,

describe the relationships among variables…

Data for this study was collected using a survey technique This technique

“provides a quick, efficient and accurate means of assessing information on a population, especially in the case of a lack of secondary data” (Zikmund, 1997- cited in Quan, 2006)

The research process of this study is shown in figure 3.2

Figure 3.2 Research process

EFA: Exploratory Factor Analysis MLR: Multiple Linear Regression

DROP Item(s) with item- total correlation < 3

3.3 2 3Develop questionnaire

Measurement scales used in this study are generated based on previous studies that have been discussed in the literature review Five categories of factors influencing individual investor’s behavior contained in the research model include: 1) self-image/firm-image coincidence, 2) accounting information, 3) neutral information, 4) advocate recommendations, 5) Personal financial needs

After carefully considering the theories and previous research, a first draft of questionnaire was composed As discussed in chapter two, this first draft was constructed based on mainly Al-Tamimi questionnaire with which he measured factors influencing individual investor behavior in UAE Financial Market; some references to previous researches of investor behavior in stock market have been made to improve the reliability and consensus of the first draft

After it was translated into Vietnamese, this first draft of questionnaire was discussed with a financial expert (Dr Võ Thị Quý) to check these items were appropriate and comprehensive for Vietnamese investors After discussing, there have been some modifications such as adding two items “fluctuation of gold’s price” and

“fluctuation of dollars’ price”, wording was modified

Then, the researcher carried out mini group discussion with 9 investors in stock market from different security companies The purpose of this step was to examine the clarity the instrument and to be sure that all survey questions were clear in meaning and sufficient to cover the research matter in reality, from the perspective of an investor in stock market Some amendments were made after suggestions from investors such as eliminating item “religious reasons”, “get rich quick”, “gut feeling on the economy”, “The creation of the organized financial markets”, “Increase of the firm’s involvement in solving community problems”, “Government holdings”,

“Statements from government officials”, “Attractiveness of non-stock investment”,

adding some items to make the questionnaire more concrete such as

“fluctuation/developments in the VN stock index”, “security companies recommendation”, “self-company recommendation”, … “trading volume of stock” is changed for “stock marketability” in Al-Tamimi

Some complement and elimination have been done after discussion with the financial expert and investors in group discussion The final version of questionnaire was made in Vietnamese including 30 items categorized in 5 groups (Table3.1) and then was translated back into English (Observed variables) The respondents were asked to rate their opinion on a 5 point ordinal Likert scale, where a 5 equal to

“extremely influence”, and a 1 represents “no influence”

Table 3.1: The measurement of scale of variables in this research

Self-Image/Firm-Image Coincidence

1 V11- Feelings for a firm’s products and services

2 V12- Reputation of the firm’s shareholders or leader

3 V13- Reputation of the firm

4 V14- Firm status in industry

5 V15- Perceived ethics of firm

Accounting Information

6 V21- Expected corporate earnings

7 V22- Condition of financial statements

8 V23- Dividends paid

9 V24- Expected dividends paid

10 V25- Affordable share price

11 V26- Past performance of the firm

Neutral Information

12 V31-Information obtained from the internet, newspaper

13 V32-Government’s policy (tax, monetary, interest rate)

14 V33-Fluctuation/developments in the VN stock index

15 V34-Current economic indicators (such as GDP, inflation…)

16 V35-Fluctuation of gold’s price

17 V36-Fluctuation of dollars’ price

18 V37-Fluctuation of the world stock index

19 V38-Trading volume of stock

Advocate Recommendation

20 V41-Specialist recommendation

21 V42-Broker recommendation

22 V43-Friend or family member opinions

23 V44-Security companies recommendations

24 V45-Self –company recommendation

25 V46-Opinions of the firm’s stockholders

Personal Financial Needs

26 V51-Idle cash available

27 V52-Diversification needs

28 V53-Minimizing risk

29 V54-Expected profit from stock

30 V55-Profit from stock higher than from other investment field

3.4 2 4Pilot test

The purpose of pilot test was to refine the questionnaire to help respondents to avoid problems in answering questions and to increase the quality of data recorded for the main survey A pool of 30 candidates answered the final questionnaire They also were asked if there were any difficulties in answering the questionnaire, minor change

was made to the questionnaire Their results also were analyzed to calculate reliability

of the questionnaire Reliability of the measures was assessed with the use of Cronbach’s alpha The overall Cronbach’s alpha for the questionnaire is 0.817 Cronbach’s alpha shows that the questionnaire is reliable

3.5 2 5Main survey

The main survey was conducted with investor in HOSE Firstly, items are analyzed using an exploratory factor analysis (EFA) method to determine the actual dimensions of each construct In this step, items with factor loadings less than 0.4 are deleted Then, the measures of each constructs are refined by Cronbach’s alpha coefficients The purpose of this test is to provide a preliminary evaluation and refinement of the measurement scales Reliability analysis is first used to remove items with low item-total correlations (<0.3) (Nunnally 1978 - cited in Quan, 2004, quoted Phong, 2009) Scales with a Cronbach’s alpha coefficient equal to or greater than 0.6 are acceptable in some cases (Nunnally, 1978; Peterson, 1994 – quoted in Trong & Ngoc, 2005 cited Lam Hong Phong, 2009) Finally, the measures retained are run to identify the most and the least factors influencing on Vietnamese individual investor’s behavior by mean value and compare mean (One way ANOVA with Post hoc test Bonferroni)

4 13.5.1 Sampling

The basic idea of sampling is that by selecting some of the elements in a population we may draw conclusions about the entire population Some considerations for selecting the scope and methodology for sampling are cost, the accuracy of results, the speed of data collection and the availability of population elements (Donald & Pamela, 2003)

The first step in sampling is that the population should be correctly defined A population is the total collection of elements from which we wish to draw some

conclusion

After identifying the population, researchers will choose an appropriate sampling method basing on either requirements of the project, their objective or budget available Two most common sampling techniques are probability sampling and non-probability sampling

The population for this study is limited to the factor influencing investor behavior

in Vietnamese Stock Exchange However, it is impossible to identify all the investors that make up the whole population, or to establish a sampling frame that includes a large proportion of the population Another limitation, this study uses a non-probability sampling technique, specifically, convenience sampling This is one of the least reliable sampling techniques, but it is the cheapest and easiest, and is the most feasible for this study

Any individual investors who are voluntary are asked to answer the questionnaire Data are collected directly from survey from June to August this year (2010) at Nhat Viet Security, Ocean Security, Dai A Security, HSBC, and National University…

4 23.5.2 Sample size

According to Donald & Pamela (2003), a good sample should satisfy both accuracy and precision On the one hand, it should bring little or no systematic bias in variance, and on the other, the sampling error should fall within acceptable limits for the study’s purpose

There is no consensus in the literature on how large the sample size should be to represent a population A host of formulas to calculate the sample size are provided, but they are not easy to apply The sample size is determined by the level of precision and confidence desired in estimating the population parameters, as well as the variability in the population itself (Canava et al., 2001, cited Lam Hong Phong, 2009)