The factors influencing individual investors behavior in vietnam stock exchange

MINISTRY OF EDUCATION AND TRAININGUNIVERSITY OF ECONOMICS HOCHIMINH CITY Phùng Viết Nhiên THE FACTORS INFLUENCING INDIVIDUAL INVESTOR’S BEHAVIOR IN VIETNAM STOCK EXCHANGE MASTER’S THESIS

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

Phùng Viết Nhiên

THE FACTORS INFLUENCING

INDIVIDUAL INVESTOR’S BEHAVIOR

IN VIETNAM STOCK EXCHANGE

MASTER’S THESIS

In Business Administration Ology code: 60.34.05 Supervisor Professor- Dr VÕ THỊ QUÝ

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

I would like to express my deepest gratitude and honor to my dear parents fornot only the love they devote to me but also for the time I took from them whichshould have been my devotion to them in their aged time

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

My thanks would also go to all of my colleagues from Nguyen Tat Thanhcollege, my classmates, especially, Lam Hong Phong, Nguyen Thanh Trung and MsDang 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, NhatViet Security, Vietcombank, HSBC, National university… for their great support Mythanks would also go to the respondents, without them, my thesis could not have beendone

This paper aimed at identifying the most and the least influencing factors on theVietnamese investor’s behavior Base on Al-Tamimi’s questionnaire, this researchdeveloped a modified questionnaire The questionnaire included thirty items thatbelong 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 somefactors The most interested factors were Condition of financial statements, Expectedcorporate 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 shareprice, Firm status in industry, Expected dividends The least factors were related toadvocate recommendations such as Self-company recommendation, Friend or familymember opinions, Opinions of the firm’s stockholders, Broker recommendation,specialist recommendation, and Security company’s recommendations Factors namelyFluctuation of gold's price, Minimizing risk, Fluctuation of dollars' price, Feelings for afirm's products and services, Reputation of the firm's shareholders or leader are also theleast influencing factors on investor’s behavior

Key word: individual investor’s behavior.

TABLE OF CONTENT

-Chapter 1: INTRODUCTION

1.1 Introduction page 11.2 Research background page 11.3 Problem statement page 31.4 Research objective page 31.5 Scope and methodology of the study page 31.6 Contribution page 41.7 Structure of the study page 4

Chapter 2: LITERATURE REVIEW

2.1 Introduction page 6 2.2Someofrelatedtheory page 62.2.1 The concept of investors page 62.2.2 Security Selection: the Treynor-Black model page 72.2.3 Security analysis page 82.2.4 Technical analysis and Fundamental analysis page 132.3 Previous researches page 152.4 Research question page 252.5 Conclusion page 25

Chapter 3: METHODOLOGY

3.1 Introduction page 26

3.2 Research design page 263.3 Develop questionnaire page 293.4 Pilot test page 313.5 Main survey page 323.6 Conclusion page 34

Chapter 4: DATA ANALYSIS AND FINDINGS

4.1 Introduction page 354.2 Descriptions of sample page 354.3 Exploratory factor analysis (EFA) page 374.4 Reliability testing page 404.5 The most and the least factors influence on investor’s behavior page 42

4.5.1 Effect of 8 groups of variables on investor’s behavior page 424.5.2 Effect of separate variables on investor’s behavior page 484.6 Conclusion page 53

Chapter 5: CONCLUSIONS AND IMPLICATIONS

5.1 Introduction page 565.2 Summary of the study page 575.3 Implications of this study page 585.4 Conclusions of this study page 615.5 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

Appendix 4 – Compare mean of variables page 70

LIST OF FIGURES

Figure 1.1 Outline of chapter 1 page 1

Figure 1.2 Structure of the study page 5

Figure 2.1 The structure of Chapter 2 page 6

Figure 3.1 Outline of chapter 3 page 26

Figure 3.2 Research process page 28

Figure 4.1 Outline of chapter 3 page 35

Figure 5.1 – Outline of chapter 5 page 56

LIST OF TABLES

Table 2.1: The factors influencing on equity selection process of individual investor in USA in Nagy’s research

Table 2.2: The factors influencing on equity selection process of individual investor in Greek in Merikas’ research

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

Table 3.1: The measurement of scale of variables in this research page 30Table 4.1 – Sample characteristics page 36

Table 4.2 – KMO and Bartlett's Test page 38Table 4.3: Rotated component matrix page 39

Table 4.4: Reliability of the measurement instrument page 40

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

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 page 51

Table 4.10: The most influencing factors in this research, Nagy, Merikas and Al-Tamimi

Table

4.11: The least influencing factors in this research, Nagy, Merikas and Al-Tamimi

page 55 page 52

page 43

page 23

page 19 page 17

Chapter 1: INTRODUCTION

1.1 Introduction

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

Figure 1.1 Outline of chapter 1

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

As of 2006, particularly in end-year half, quantity of listed companied increasedquickly, 196 companies were listed at the end of 2006 In total there were thirteenlicensed securities companies Along with rising of listed companies, VN indexincreased 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 stockmarket really broke out The market was hot continuously regardless of the warning ofexperts and pinnacle of VN index was 1170 on 13/03/2007

There had been 249 companies listed on stock market until 2007 Of these, 138are 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 developedcountries, perhaps Vietnam market is not worth considering However, 30 billion USdollars 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 haspositive contribution The Vietnamese Stock market have experience strongfluctuation: 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 tobuy stock but at the highest (over 1100 point), some investors fight to buy stock Sowhat make investors buy and/or sell stock? Which factors influence investor’s

1.3 Problem statement

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

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

1.4 Research objective

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

1.5 Scope and methodology of the study

1.5.1 Scope of the study

The Ho Chi Minh Stock Exchange have more listed company and tradingvolume than Hanoi Stock Exchange, so my study just focuses on individual investors atthe Ho Chi Minh City Securities Center Therefore they may not represent for allindividual investors in Vietnamese Stock Exchange

1.5.2 Research Method

This study was conducted with two phases: a pilot test and the main study Inthe first phase, a qualitative approach was employed in order to explore whether thescale 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 ofthis phase was to re-assess the reliability of the measurement scales using Cronbachalpha coefficient and Exploratory Factor Analysis (EFA) SPSS software version 16.0was used for data analysis Chapter 3 will discuss the methodology for this study inmore detail

1.6 Contribution

The study is important for individual investors, companies listed in VietnameseStock market For both local and international investors, the factors influencing onindividual investor’s behavior is the most important because this would affect theirprofit 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 theVietnamese listed companies and they invest in Vietnamese stock Market Forcompanies, identifying the most influencing factors on individual investor’s behaviorwould affect their future policies and strategies Finally, for government, identifyingthe most influencing on individual investor’s behavior would affect legislations and theadditional procedures needed in order to satisfy investors’ desires and also to give moresupport to market efficiency

1.7 Structure of the study

The structure of this study is shown in figure 1.2

Figure 1.2 Structure of the study

Chapter 2: LITERATURE REVIEW

2.1 Introduction

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

Figure 2.1 The structure of Chapter 2

2.2 Some of related theory

2.2.1 The concept of investors

Institutional investor is a entity with large amounts to invest, such as investmentcompanies, mutual funds, brokerages, insurance companies, pension funds, investment

fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves They account for a majority of overall volume.

Opposite institutional investor, an individual who purchases small amounts ofsecurities for his/her own account, as opposed to an institutional investor, also calledretail investor or small 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 constructionmodel for managers who use security analysis The investor use security analysis toconstruct an active portfolio

The security analyst must forecast the dividends and earnings that can beexpected 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 ofthe firm determines the dividends it can pay to shareholders and the price it willcommand in the stock market Because the prospects of the firm are tied to those of thebroader economy, however, valuation analyses must consider the business environment

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

Therefore, in analyzing a firm’s prospects it often makes sense to start with thebroad economic environment, examining the state of the aggregate economy and eventhe international economy From there, one considers the implications of the outsideenvironment on the industry in which the firm operates Finally, the firm’s positionwithin the industry is examined (Bodie-Kane-Marcus: Essentials of investment, page381)

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

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

To understand clearly, we will study what security analysis is, particularly whatfundamental 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 analysisand technical analysis Fundamental analysis helps investors to select the appropriateportfolio structure Technical analysis help investors choose the time and stock tradingstrategies 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 thenanalyzing 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 globalmacro-economy, there is considerable variation in the economic performance acrosscountries 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 alongwith earnings and ratio of stock price to earnings per share varies with factors such asinterest 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-monetaryfield However, there are three most basic macroeconomic factors impacting directly tothe investment activities in stock market, such as exchange rates, interest rates andinflation rates The following analyzes their effect in detail

— Exchange rates: when the investor realizes that the domestic currency can bedevaluated in the next time, the investor will decide not to invest in securities or willseek to replace the securities with foreign currency assets to prevent stock valuedecrease

— Inflation is the rate at which the general level of prices is rising Inflation andinterest rates are two very important factors causing a great impact on investmentdecisions in the stock market.

— Interest rates

Bodie-Kane-Marcus said that the level of interest rates is perhaps the mostimportant macroeconomic factor to consider in one’s investment analysis Forecasts ofinterest rates directly affect the forecast of returns in the fixed-income market If yourexpectation 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 interestrates tend to be bad news for the stock market Unanticipated increases in ratesgenerally are associated with stock market declines Thus, a superior technique toforecast rates would be of immense value to an investor attempting to determine thebest 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: ifcompanies operate efficiently, the demand for capital to expand production will behigher and at the same time there will be many new businesses established For thisreason, demand for capital is high, thus pushing interest rates higher

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

Macroeconomic environment has an important role to decide the overall trend ofthe stock market Generally, when the economy is in growth phase and prosperity, thestock market will develop and vice versa when the economy is in recession and crisisphase, the market will go down

Thus, if we can predict development tendency of the economy, then we canforecast the development trend of the stock market overall However, the realitysurveys have showed that the actual relationship between the economic situation andthe 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 marketover the world actually showed that there have been several fast-growing periods of theeconomy, 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 thepeak of the economic cycle and select the time to participate or withdraw from thestock market

2.2.3.3 Government policy

Base on Bodie-Kane-Macus (Essential Investment, page 388), government policy haveinfluent 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 tostimulate or to slow the economy Decreases in government spending directly deflatethe demand for goods and services Similarly, increases in tax rates immediately siphonincome from consumers and result in fairly rapid decreases in consumption

Monetary policy refers to the manipulation of the money supply to affect themacroeconomic and is the other main leg of demand-side policy Monetary policyworks largely through its impact on interest rates Increases in the money supply lowershort-term interest rates, ultimately encouraging investment and consumption demand.Over longer periods, however, most economists believe a higher money supply leadsonly 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 someconsumption 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 propermonetary policy

2.2.3.4 Industry analysis

Industry analysis is important for the same reason that macroeconomic analysisis: Just as it is difficult for an industry to perform well when the macroeconomic isailing, 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 corresponsiveinvestment returns should be

Risk of each industry has not much variation over time, so we can analyze therisk 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 impactsignificantly on the activities of companies

The political situation is very influential to the stock market Political factorsinclude changes in government and political-economic activities of many countries.Political change makes many regulations and government control in some sectorstightened and in other sectors loosen, resulted in a major impact on business results ofeach 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 thelaw governing Mergers and acquisitions law may impact negatively or positively to agroup of companies Therefore, the legal environment should be considered underdifferent 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 ofthe investor or not, encourage the trading activity or not, enough power to ensure thatsecurities 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 thestock Followers of technical analysis are known as chartist as they look at the pastprices of the stock and identify patterns and trends They do so to forecast through thecharts and prices what the stock will do in the future, and hoping to find pattern theycan exploit to make a profit The methodology involves studying the supply anddemand 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 chartistcompares stock performance over a recent period to performance of the market or otherstock in the same industry (Essentials of investments – Zvi Bodie, Alex Kane, AlanJ.Marcus- page 247 to 248)

Fundamental analysis on the other hand involves valuing a company to determineits fair or intrinsic value This analysis method uses earning and dividend prospect of

the firm, expectations of future interest rates, and risk evaluations of the firm todetermine proper stock prices Fundamental analysts usually start with a study of pastearning and an examination of company financial statements They supplement thisanalysis with further detail economic analysis, ordinarily including an evaluation of thequality of the firm’s management, the firm’s standing within its industry, and theprospects for the industry as a whole The hope is to attain some insight into the futureperformance 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 analysisshould be used for trading or investing? Technical analysis does not consider thequalitative factors which are really important for analytical purposes Only charts,indicators and volume analysis cannot completely describe whether the stock is worthbuying or not long term To gain a long term perspective, fundamental analysis isrecommended as it will incorporate the information that has significant value for aninvestor The information contains both quantitative and qualitative research However,when going long on a security from an investment perspective technical analysis willaid your entry But, in retrospect the theory behind long term investing takes out theworry from the day to day volatility and thus fundamental analysis would weigh moreimportant 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 newsannouncement to take place In this shorter time frame especially used for option andleveraged trading technical analysis is very useful and should be understood.Understanding: price patterns, candle sticks, support and resistance, moving averagescombine with volume and an idea as to what the industry group and overall market isdoing from a technical aspect is necessary to picking your entries and exits.(http://businesstm.com/investment-traders/technical-analysis-fundamental-analysis-

whatsthedifferencetheproscons/ March 19, 2010 By Kirk Paterson BusinessTM.com/Invement-Traders)

-In summary, we can see that there are many factors to affect the securitiesinvestment All the information from publicly available information to inside enterpriseinformation, such as the accounting information, market information, stock prices inthe past, information relating to the operation of the business, all are reflected in stockprices 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 theinvestors base their investment options, that is fundamental and technical analysis Toanalyze an efficient way, then we will analyze the overall macro-economic situationsuch as GDP, inflation , to information about government policies (taxes, interestrates, monetary policy ), then down the information analysis of the security sector,and final review of accounting information for that stock In addition, all relevantinformation, even information relating to executives, leaders and policies, thedevelopment trend of that company were dissected to examine, in particular it is also ofinterest 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 areimportant to analyze when deciding to buy or sell securities? Let's find out in the nextsection

2.3 Previous researches

Professor Kahneman found that under conditions of uncertainty, humandecisions 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 thatsystematically diverge from basic principles of probability His work has inspired a

new generation of research employing insights from cognitive psychology to enrichfinancial 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 tothe individual investor behavior is the emphasis of this paper

Nagy and Obenberger (1994) examined which factors had greatest influence onthe equity selection process of individual investors in USA They developed aquestionnaire including 34 variables and asked 137 participants And they identified 7relatively 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 (expectedearning, diversification needs, and risk minimization) are important to investors, eventhough investors employ diverse criteria when choosing stocks Contemporaryconcerns such as local or international operations, environmental track record and thefirm’s ethical posture appear to be given only cursory consideration Therecommendations of brokerage houses, individual stock brokers, family members andco-workers go largely unheeded Many individual investors discount the benefits ofvaluation models when evaluating stocks Almost 40% of individual investorsapparently did not make use of valuation model, even one as readily available asprice/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 CoverageRecent Price MovementsInformation from Investment Advisory ServicesAccounting Information Financial Statements

Annual ReportsProspectusesValuation TechniquesExpected EarningsSelf-Image/Firm-Image Coincidence Firm

Reputation Firm StatusFeelings about Products/ServicesPerceived Ethics of Firm

Share Price AffordabilityTax ConsequencesRisk MinimizationSocial Relevance Environmental Record

Local OperationsInternational Operations

Individual Stock BrokerFriends/CoworkersPersonal Financial Competing Financial Needs

Diversification Needs

Krishnan and Booker (2002) carried out a study on 106 MBA students inPittsburgh University to examine the factors influencing the decisions of investors whouse analysts' recommendations to arrive at a short-term decision to hold or to sell astock Specifically they examined if the presence of analysts' recommendations reducesthe tendency for investors to commit the disposition error, i.e., sell winning stocks toosoon and hold losing stocks too long They also examined whether the strength ofsupporting arguments to the analysts' recommendations affects investor decisions.Their results indicated that the presence of an analyst summary recommendation reportreduces the disposition error for gains but not for losses A strong form of the analystsummary recommendation report, i.e., one with additional information supporting theanalysts' position further, reduces the disposition error for gains and also reduces thedisposition 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 wealthcriteria, surprisingly more than half of the respondents considered no other factorimportant 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 themsignificant 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 subjectivesince factor analysis identifies only the homogeneous cluster groups The assignment

of the factors was undertaken by the factor analysis, however, considerable subjectivejudgment and common sense was also employed to clarify discrepancies Theyanalyzed information into 5 groups: accounting information, subject/ personal, neutralinformation, advocate recommendation, personal financial needs (as illustrated in table2.2) The results indicated that individuals based their stock purchase decisions oneconomic criteria combined with other diverse variables The results also revealed thatthere is a certain degree of correlation between the factors that behavioral financetheory and previous empirical evidence identify as the influencing factors for theaverage equity investors

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

Accounting Information Condition of financial statements

Expected corporate earningsExpected dividends

Firm status in industryAffordable share pricePast performance of stock

Subjective/Personal Get rich quick

Feelings for a firm’s products & servicesProtection or not of the investor

Gut feeling on the economyPerceived ethics of firmPolitical party affiliation

Neutral Information Coverage in the press

Recent price movements in a firm’s stockStatements from politicians & governmental officialsFluctuations/developments in the indices of the major marketsCurrent economic indicators

Reputation of the firmEnvironmental record

Advocate Brokerage house recommendation

Recommendation Family member opinions

Friend or coworker recommendationsOpinions of the firm’s majority stockholders

Personal Financial Needs Diversification needs

Attractiveness of non-stock investmentsEase of obtaining borrowed funds

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

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

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

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

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

Kadiyala and Rau (2004) investigated investor reaction to corporate eventannouncements They found that investors appear to under-react to short-terminformation available prior to the event as well as to the information conveyed by theevent itself, leading to different patterns: return continuations and return reveals, bothdocumented in long-horizon return They found no support for the overreactionhypothesis.

Al-Tamimi (2006) researched the most and the least factors influencingindividual 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, advocaterecommendations and personal financial needs Detailed items are listed in the table4.3 And his study conducted on 343 individual investors

self-The results are:

(i) accounting information or the classical wealth–maximization criteria is themost influencing group on the UAE investor behavior, namely “the expectedearning”, “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 investorbehavior, namely “Expected Losses in other local investments”, “Minimizingrisk”, “Expected Losses in international financial markets”, “Diversificationneeds”, “Attractiveness of non-stock investment”

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

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

1.Self- 1 Religious reasons

Image/Firm-Image 2 Feelings for a firm’s products and services

Coincidence 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 firm10.Increase of the firm’s involvement in solving community problems

2.Accounting 11 Stock Marketability

Information 12 Expected corporate earnings

13.Condition of financial statements

14 Dividends paid

15 Affordable share price

16 Expected Dividends

17 Past performance of the firm’s stock

3.Neutral 18 Government holdings

Information 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

24 Recent price movement in a firm’s stock

4.Advocate 25 Broker recommendation

Recommendation 26.Family member opinions

27 Friend or coworker recommendations

28 Opinions of the firm’s majority stockholders

5.Personal 29 Attractiveness of non-stock investment

Financial Needs 30 Diversification needs

31 Ease of obtaining borrowed funds

32 Minimizing risk33.Expected Losses in international financial markets

34 Expected Losses in other local investments

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

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

In summary, there have been several studies to investigate factors influencingindividual 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 mainfindings 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

2.4 Research question

This study intends to answer the following questions:

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

2.5 Conclusion

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

To measure the factors influencing individual’s behavior constructs, the currentstudy employs a descriptive method This method was chosen because it allows theresearcher 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 apopulation, especially in the case of a lack of secondary data” (Zikmund, 1997- cited inQuan, 2006)

The research process of this study is shown in figure 3.2

MLR Item(s) factor Item(s)Item(s)withwithitemfactor-Item(s) with item-total

correlation < 3 One-way ANOVA loading < 4

Testing research Testing hypotheses

Results

model

EFA: Exploratory Factor Analysis

MLR: Multiple Linear Regression

Figure 3.2 Research process

3.3 Develop questionnaire

Measurement scales used in this study are generated based on previous studiesthat have been discussed in the literature review Five categories of factors influencingindividual 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 ofquestionnaire was composed As discussed in chapter two, this first draft wasconstructed based on mainly Al-Tamimi questionnaire with which he measured factorsinfluencing individual investor behavior in UAE Financial Market; some references toprevious researches of investor behavior in stock market have been made to improvethe reliability and consensus of the first draft

After it was translated into Vietnamese, this first draft of questionnaire wasdiscussed with a financial expert (Dr Võ Thị Quý) to check these items wereappropriate and comprehensive for Vietnamese investors After discussing, there havebeen 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 stockmarket from different security companies The purpose of this step was to examine theclarity the instrument and to be sure that all survey questions were clear in meaningand 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 aseliminating 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 fromgovernment officials”, “Attractiveness of non-stock investment”, “Expected Losses ininternational financial markets” … wording some items and

adding some items to make the questionnaire more concrete such as

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

Some complement and elimination have been done after discussion with thefinancial expert and investors in group discussion The final version of questionnairewas made in Vietnamese including 30 items categorized in 5 groups (Table3.1) andthen was translated back into English (Observed variables) The respondents wereasked 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 Pilot test

The purpose of pilot test was to refine the questionnaire to help respondents toavoid problems in answering questions and to increase the quality of data recorded forthe main survey A pool of 30 candidates answered the final questionnaire They alsowere 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 ofCronbach’s alpha The overall Cronbach’s alpha for the questionnaire is 0.817.Cronbach’s alpha shows that the questionnaire is reliable

3.5 Main survey

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

3.5.1 Sampling

The basic idea of sampling is that by selecting some of the elements in apopulation we may draw conclusions about the entire population Some considerationsfor 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

After identifying the population, researchers will choose an appropriate samplingmethod basing on either requirements of the project, their objective or budgetavailable 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 investorsthat make up the whole population, or to establish a sampling frame that includes alarge proportion of the population Another limitation, this study uses a non-probabilitysampling technique, specifically, convenience sampling This is one of the least reliablesampling techniques, but it is the cheapest and easiest, and is the most feasible for thisstudy

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 NhatViet Security, Ocean Security, Dai A Security, HSBC, and National University…

3.5.2 Sample size

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

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

Because of limitation about time and money, the sample size for this study was