Impact of investor sentiment on decision-making in Indian stock market: an empirical analysis

Abstract

Purpose The purpose of this paper is to analyze the relationship between the factors influencing investors sentiment and investment decision-making (DM) of the individual investors. This paper proposes a unique conceptual framework that incorporates the herding, market and awareness factors that are leading to investor sentiment (IS) and decision-making process of the individual investors. Design/methodology/approach This study has conducted a questionnaire-based survey to collect data from 875 individual investors through the convenience sampling method. Structural equation modeling was used to evaluate the relationship between factors, namely, market effect, herd behavior, media, social interaction and advocate recommendation that influences IS and DM. Findings The present study found that market effect and herding are the most significantly influencing factors of investors sentiment. Among the sources of awareness, the internet has the lowest influence when compared to media, social interaction and advocate recommendation. Practical implications This study will help individual investors to avoid the problems faced while making an investment decision. The study could help investors to select a suitable investment aid and avoid repeating expensive errors, which arise due to investors’ sentiment. It is recommended to increase the awareness regarding investors’ sentiment among individuals, so as to increase their understanding about the financial settings and to make them confident while investing. The present study also sheds light upon the behavior of Indian individual investors so that policymakers can take appropriate measures to provide the proper guidance. Policymakers can conduct awareness campaigns to increase investors’ knowledge on the market condition and to enhance proper investment DM among them. Originality/value To best of the authors’ knowledge, previous studies have focused on limited factors at a time. The present study has investigated how factors influencing investors sentiment, namely, market factors (MF), herding as well as awareness would influence investment DM among individual investors in India. The influence of these factors has never been studied simultaneously in the context of Indian individual investors’ DM.

Aggressive investment choices – Do cultural values and past investing experiences play a role?

“…Rachmawati and Suroso (2020) suggest that culture could be leveraged as a filter through which leadership influences business performance. In the financial context, past research stated that culture has an impact on personal values, which can lead to psychological biases including overconfidence, conservatism, herding and inability to comprehend information (Lucey and Zhang, 2010; Ph and Uchil, 2020). Foremost, culture reflects differences in the kind of individual biases that influence investors' financial choices.…”

“…Rustichini et al (2016) used Aggressive investment choices risk propensity to demonstrate differences in investment behaviour across cultures. Studies have emerged that provide understanding of the impact of cultural traits and individual cultural differences on risky financial decisions (Ph and Uchil, 2020). Studies have discovered that cultural features have a substantial impact on the behaviour and level of engagement of investors in financial markets (Sonsino et al, 2021).…”

Using E-GARCH to Analyze the Impact of Investor Sentiment on Stock Returns Near Stock Market Crashes

“…Ye et al (2020) noted that sentiment generates when investors rely on their own imperfect understanding of the market and their own cognitive psychology. Brown and Cliff (2004) and Haritha and Uchil (2019) consider investor sentiment as representing the investors' personal expectations for the market's rate of return. For example, investors with high optimism have higher expectations of yield than pessimistic investors have.…”

Do Banking and Financial Services Sectors Show Herding Behaviour in Indian Stock Market Amid COVID-19 Pandemic? Insights from Quantile Regression Approach

“…Given the aforementioned theoretical and empirical observations, and the footprints of the unexpected outbreak of novel coronavirus, the following points justify why a study on herding behaviour is required amid COVID-19 spread outs: (a) the sudden outbreak of the pandemic had made the investors panicky in the initial phase and, thus, caused a sudden downfall in the performance of stock indices in India; (b) the pandemic has created a wide range of crises such as health, economic and financial crises in the country; (c) as the pandemic containment measure, governments at the centre and state levels announced and implemented several socio-economic and financial measures apart from the health-specific measures, which may have impacts on investment decisionmaking; and (d) amid the pandemic, Indian stock market has witnessed both the bull and bear market conditions. Further, a study on herding behaviour is significant from a policy point of view because its existence has adverse effects on stock market movements (Haritha & Uchil, 2019;Jaiyeoba et al, 2018), the volatility of asset returns (Demirer & Kutan, 2006) and on market efficiency (Yousaf et al, 2018). Therefore, this piece of work is an effort to examine the herding effect amid the ongoing COVID-19 pandemic.…”