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Risk Seeker Or Risk Averter Finance Essay

This research study intends to examine the impact of age, gender, marital status, and financial literacy, accounting information, openness to experience, information asymmetry and changes in consumption level on individual investors’ decision making through the empirical research of the people living in Karachi city. Any investment is made with the primary objective of earning return on the invested sum. And depending on the degree of risk any individual can be classified as either RISK SEEKER or RISK AVERTER.

Quantitative research was conducted to determine the relationship between desired explanatory and response variables. The obtained results show that gender does not affect risk seeking ability of individuals; however married people prefer to invest in highly secured investment. But as age and experience increase investor preference changes to less risky investments. Consumption level too make investor risk averse and reinvestment intentions does not mean that people will become risk averse, they may invest in risky instruments to get the higher return.

ACKNOWLEDGEMENT

I thank Allah for guiding me through the phases of compiling this research study and helping me in all the difficulties.

I would like to take this opportunity to thank Ms. AMNA MUNIR and Mrs. Ambreen Faizan, my instructors for “THESIS” at JINNAH UNIVERSITY FOR WOMEN, for their valuable support and encouragement, which they have offered.

It could not have been made possible without the immense help and cooperation of my family members and my classmates’ .Without their support and the amount of time that they gave me, this report would not have existed.

Thank You

LETTER OF TRANSMITTAL:

TABLE OF CONTENTS:

INTRODUCTION:

Any investment is made with the primary objective of earning return on the invested sum. And depending on the degree of risk any individual can be classified as either RISK TAKER or RISK AVERTER. Duration of an investment is another aspect for any investment decision. Short term investments are rather riskier than long term investments in securities. Real estate and stock market investments have been important subjects in the past years. More and more people invested in stocks and real estate. The reason for this was to secure money for future needs. But due to recent global financial crises, investment decisions are considered as important task in our daily life. For this reason, it is necessary to understand various factors which prompt individual investors to make individual investment decisions. The objective of this study is to identify some core factors which affect investors’ willingness to invest.

The main reason for choosing Karachi for research is that; Karachi is the growth pole of Pakistan and is a residence of about one corer population and about 70 percent of investors. But since last four years there has been observed an apparent change in investors’ preferences about investments, as law and order situation is critical to attract any foreign and local investment in Pakistan in general and Karachi in particular. Political and macro economical instability make investment environment less conducive for investors and continue depreciation of Pakistani currency has made investment in international trade less frequent. Electricity and fuel crises have made the industrial performance miserable that force the investors to move to neighboring country like Bangladesh.

Consumer behavior research began in 1960s but there have been few studies on consumer decision making. Financial products investors often purchase investment products by drawing an experience and expertise of investors provide them with risk awareness and so have become important commodity for risk assessment and awareness. The propensity to build up can affect actual behavior, where risk refers to how far decision makers are prepared to extend their exposure to risk. Risk perception forms the basis of risk communication which means that people facing uncertainty and ambiguity in the available information, construct inferences and draw conclusion from them. Behavior finance scholars believe in objective consideration of investment risk and return, all these factors can strongly affect the individual investment decision.

Many researchers have discussed the investment behavior and tried to enhance the understanding of people managing investments in different ways. If we go through the available literature, it is mainly personal characteristics that influence investment decision making. The nature of psychological factors and individuals’ behavior at the time of investment decision making is under discussion. Various psychological factors like beliefs, preferences, and psychological biases have been found, saving attitudes and risk attitudes. To date however, there has been very little work on the impact of financial literacy, accounting information, openness to experience and information asymmetry in the individual investors’ decision making. The purpose of this study is to determine how the personal investment is affected by the level of knowledge an investor possesses about different investment instrument, knowledge of the relationship between risk and return along with the knowledge of industrial sectors, economic indicators, companies performance analysis technique, portfolio management techniques, etc.

PROBLEM STATEMENT:

To date however, there has been very little work on the impact of financial literacy, accounting information, reinvestment intentions, gender, consumption level, marital status, openness to experience and information asymmetry in the individual investors’ decision making. This research study intends to examine the impact of these factors on individual investors’ decision making through the empirical research of the people living in Karachi city.

Real estate and stock market investments have been important subjects in the past years. More and more people invested in stocks and real estate. The reason for this was to secure money for future needs. But due to recent global financial crises, investment decisions are considered as important task in our daily life. For this reason, it is necessary to understand various factors which prompt individual investors to make individual investment decisions. The objective of this study is to identify some core factors which affect investors’ willingness to invest.

RESEARCH QUESTION:

The main purpose of the study is to determine:

How individual’s investment behavior changes due to their gender, reinvestment intention, their accounting information and financial knowledge. How consumption level of people influence their investment decision? And how age effects individuals’ risk seeking and risk avoiding ability?

SIGNIFICANCE OF THE STUDY:

As at now, there is very little work done about indicating the factors influencing the individual investors’ behavior in Karachi in all sectors of economy. This study will provide information about the investment decision making of people belonging to different age group, different financial sectors, and their investment preferences.

Furthermore, it will help in determining whether the more experienced investor can only make good investment decision or the financial literacy and accounting information can also help less experienced investors in making good investment decision.

It will also serve as a reference material and future guideline for further research.

LIMITATIONS OF THE STUDY:

Topic selected is very wide and include many others variable that may influence individual investor behavior other than the variables discussed in the study.

DELIMITATIONS OF THE STUDY:

Despite of loads of burden at the end of semester and shortage of time, due care was taken not to sacrifice the quality and in-depth of this study. This study as shown has attempted to identify the different investment behavior of investors in Karachi

OBJECTIVES OF THE STUDY:

The objective of this study is:

To determine how gender influence individual’s investment behavior.

To find out whether the marital status impacts investment decision of people.

To evaluate whether expectations for high return raises reinvestment intentions.

To know how openness to experience affects investments made by individual investors?

To study the impact of financial literacy of individual investor on his investment decision.

To study the effect of information asymmetry on decision making of individual investor.

To examine the influence of accounting information of individual investor on his investment decision.

To determine how age affects risk taking ability?

To evaluate how changes in consumption levels vary risk taking ability of individual investor?

SCOPE OF THE STUDY:

The scope of this study is to let people know what are some of the factors that influence the investment decision of the people of Karachi. The research was surveyed on layman who might not highly qualified but make investment decision due to his experiences, age factor, consumption level and reinvestment intentions.

LITERATURE REVIEW:

Investment behaviors are often defined as how the investors judge, predict, analyze and review the procedures for decision making, that may include information gathering, analyzing, understanding and defining (Solvic,1972;Alfredo and Vicente,2010). Investment behavior is the relationship between returns and risk. However, higher the risk, higher the return. But investor often targets to have a balanced risks and return.

Examining the activity and performance of a large panel of individual investors over the period of 2000 and 2010 in Sweden’s Premium Pension System. It was found that active investors outperform passive investors, and that there is a casual effect of fund changes on performance. (Dahlquist & Magnus, 2011) The outperformance was primarily the result of dynamic fund selection. Activity is beneficial for the individual investors, whereas extreme flows out of mutual funds affect funds’ net asset value negatively for all investors.

In the research examine the role of various socioeconomic and demographic factors affecting the investment decision of investors. An investment model was developed that described the impact of past investment experiences of investors, variation in regulatory policies, asymmetric information, their marital status, gender, and reinvestment intentions of investors. They suggested that risk perception performs the key role in the investment decision process and that the variation in the government policies can impact the risk perception of an investor (Iqbal Mahmood, 2011).

Study conducted on individual investors and financial crisis concluded that individual investor perception change, drive behavior, and impact performance during the financial crises in 2007-2009 (Arvid O. I. Hoffmann, 2011). Results suggested that people’s perception changes over the course of crises, with risk, tolerance and risk perception being less volatile than return expectation, but more subject to change compared to those in non-crises periods. During the height of crisis there is a sharp increase in the share of investors trading, their turnover, and their buy-sell ratio.

An empirical study conducted (Shyan, Gow and Hui ,2010) among Taiwanese investors to determine their past experiences and their outcomes when exposed to the economic signals. Empirical results found no difference by gender to investor propensity to take risk. However, higher and lower perceptions of risk were indicated by investors according to their personal investment experience. Investors with little experience in stocks and structured notes were found to have significantly heightened perception of risk (Rong, Chou,, Gow Liang Huang, & Hsu, 2010). Furthermore the married subjects believed that they have adequate financial management knowledge and can make better investment decision.

(George & Nanda, 2011) Their findings that absolute poor performance is associated with funds increasing risk is relevant. The reason is that it suggests the possible pathway for risk shifting incentives of individual fund to have system-wide implications-since a large economic shock could potentially induced many funds with poor absolute performance to increase risk at the same time. Hence, managerial stake, which appear effective at curbing risk shifting, should be considered from a policy perspective.

Examined the factors influencing investor behavior by conducting a survey. The findings suggested that earning per share (EPS), foreign direct investment (FDI), and GDP growth rate are positively correlated and have a significance impact on stock prices of companies listed in KSE (Karachi Stock Exchange). It also suggested that ordinary investor have lots of awareness about these variables when they invest in the stock market. They tried to make clear the investment percentage changes in Karachi Stock Exchange due to EPS, FDI and GDP growth rate during the year 2001 and 2008 (Kumar, 2011).

Focused on the relation between emotions and the investment behavior by empirically tested the behaviors of 34 people in California, in which those people were given the limited amount of money and were asked to make their investment decision after enhancing their different emotions (Baba Shiv, 2005). The result suggested that the emotions triggered by a given situation help the decision making process by narrowing down the option of reaction, either by discarding those that are dangerous or by endorsing those that are advantageous. Emotions serve an adoptive role in speeding up the decision making process. However, depending on the circumstances, moods and emotions can play a useful as well as disruptive role in decision making. Overconfident consumers are prone to realize gains early, in order to feel pride and hold on to losing stocks because admitting losses creates shame. It is also shown that overconfident investors trade in greater volumes and have greater ‘illusion of control’ (Jang, 2012).

(Merikas, 2011) Research conducted on economic factors and individual investor behavior on Greek Stock Exchange suggested that experienced and knowledge investors would readily admit that the structure and relative weights of the chosen category reflects on the average, a still unsophisticated and immature investor profile. The results revealed from 150 samples that there is a certain degree of correlation between economic factors and individual investor behavior in the Athens Stock Exchange.

An exploratory study of factors influencing investment decisions of potential investor conducted in Barbados, West Indies (Tracey, 2010). The study used a questionnaire of a sample of business students in undergraduate institutions. It was found that attitude, subjective norms, perceived behavior control, and risk propensity were significant predictors of investment intentions. It was also found that risk propensity did not moderate the relationship between the variables and the investment intentions. The findings showed that the education in business finance can help to influence the investment decision.

Over the years, the increased competition has brought a wind of change, not just in the economic environment within the country, but also a radical change in the choices and preferences of the financial consumers. In the endeavor to provide more personalized advice to the financial consumers, financial service providers need more insights into the minds of the consumers.

According to a research conducted on the “GENDER DIFFERENCES IN INVESTMENT BEHAVIOUR” at Iowa State University, gender differences in this area is not significant, but the willingness to take risk varied significantly between men and women. A majority of the women in the study preferred taking average or below-average risks, whereas men preferred taking above-average or substantial investment risks. Furthermore, women are more likely to have experienced a change in their involvement in investing due to a change in marital status, the arrival of a child, or the death of a family member. Men are more likely to increase their involvement due to retirement or sudden financial gain. For women, divorce is an important factor in bringing about increased financial involvement; for men, on the other hand, divorce is the least likely event to change their investment involvement (Milestone, 2006).

Research conducted in Taiwan related to influence of information search on risky investment preferences suggested that digital information search increases the individual interest in the risky investment because investors might reduce their uncertainty via greater understanding of companies’ financial status. It stated that due to lack of understanding for various risky investments, investors desire advice from professional advisor . They especially desire face to face contact when choosing the complex investments. (Shyan Rong, 2011)

(Thierry Foucaul, 2010) in this study a reform was considered that increases the relative cost of speculative trading for retail investors in a subset of French stock. This reform triggers a significant drop in retail trading for these stock relative to other stock, which gives us a way to identify the effect of retail investors on volatility. It was found that the effect was positive and significant.

Classical wealth maximization criteria are necessary to investors, even though investors employ different criteria when choosing stocks for investment. They tried to make clear the price changes due to the six speculation optional primary variables (payout ratio, size of the firm, asset growth, leverage, dividend yield and earning volatility) in Karachi Stock Exchange during the year 1981 to 2000 (Robert A.N., 1994). Their assessment indicates that variables other than prime variables may be more powerful and applicable to give an explanation the share price deviation in Pakistan. . Political and macroeconomical instability make investment environment less conducive for investors and continue depreciation of Pakistani currency has made investment in international trade less frequent. Electricity and fuel crises have made the industrial performance miserable that force the investors to move to neighboring country like Bangladesh.

Media is an important factor that may effect the financial behaviours of individuals in making their investment behavior. Tetlock (2007) has studied the role of media pessimism as forecasting factor on investment sentiments. There are many studies about the experimental psychology on irrationality of human decision making in financial markets (Hilton, 2011). Briefly considers the source of collective irrational choices on investors risk aversion.

It was questioned whether investors’ previous forecasting ability (inferred from prior purchases’ subsequent risk-adjusted performance) affects their future trade profitability and activity. Indeed, as an investor's inferred ability increases, so does her ensuing trade profitability and intensity. Further, because additional investment experience allows more accurate ability inference, we posit that trading experience should help investors obtain better investment performance. It not only do excess portfolio returns improve with account tenure, but we also find that trade quality (i.e., average raw and excess buy-minus-sell returns) significantly increases with experience .

A survey conducting by Lawrence Tai about UAE investors’ equity decisions making concluded that UAE investor consider foreign market movements when they make equity investing decision. Portfolio analysis appears to have little or no affect on investors’ approach to stock valuation (Tie, 2012). Individual investors prefer to use EPS and ROI, while professional investors to use P/E ratio and EPS in their analysis.

(Tun Pin Chong, 2011)An empirical research related to equity selection process in Malaysia indicated neutral information appeared to be the most important factor the Malaysian investors, followed by accounting information, social relevance and advocates’ recommendations in equity selection process. Neutral information was positively correlated in while accounting information was negatively correlated with expected return. The study concluded that investment decision of investors did not rely on single integrated factor.

(Poterba, 1990) In his research conducted on the equity portfolio holders in Japan, U.S and Britain concluded that different nations do not always move together, investors may diversify their portfolios by holding assets in different countries. The benefits of international diversification has been recognized for decades and in spite of that, most investors prepare to invest in domestic assets. It is so because investors in each nation expect return in their domestic equity market to be several hundred basis points higher than the return in other markets. Lack of diversification appears to be the result of investors choices rather than institutions constraints.

Any investment is made with the primary objective of earning return on the invested sum. And depending on the degree of risk any individual can be classified as either RISK TAKER or RISK AVERTER. Duration of an investment is another aspect for any investment decision. Short term investments are rather riskier than long term investments in securities. Real estate and stock market investments have been important subjects in the past years. In the research about Demographics and Financial Behaviors found that gender (Suleyman Gokhan Gunay, 2011) has interaction with five financial behavior factors, that are, overreaction, herding, cognitive bias, irrational thinking and overconfidence. Whereas, level of individual savings has interaction with four financial behavior factors, which are, overreaction, herding, cognitive bias and irrational thinking. So it was concluded that gender and saving level are effective demographic factors that interact with behavioral finance factor in investment decision.

According to a Case for Financial Literacy in Developing Countries(2009), consumers who are more financially literate are more likely to understand the importance of saving and to take action in that respect. Other potential economic benefits include better investment decision and use of financial products to facilitate business transaction.

Recession is situation of adverse effect on every aspect of the economies. It was started in US in December 2007 and affected the whole economies of the world. Indian economy has also faced the various problems due to recession. Indian Stock Market plummet down in very appalling manner due to the upshot of recession. Keeping this thing in mind an attempt was made to study the changes in individual investor's behaviour due the changes in the situation of Indian Stock Market.It was found that , investing characteristics, and decision-making processes affected individual investors during the recession period and the following period of volatile trend (Dr Babli,2012).

System risks are factors from macroeconomic factors that are unable to be eliminated from financial investments. Among all macroeconomic factors, price movement in capital market like interest rates and exchange rates, CPI may leads to impact on stock price (Miao, Yan-Yang,2002).The growth of Foreign Direct Investment also effects the investment behavior of people as more investment means more chances for progress and ultimately for the profit. Raising of employment rate too raise peoples’ living standards that allows them to participate in more investments.

(Zakaria, 2008) In his research about investment in Pakistan evaluated the investment climate in Pakistan. Paper highlighted that high doing business cost, political instability, corruption, government bureaucracy, inconsistent government policies and poor law and order situation discourage the investors. There is a strong perception among investors that the pro-business policies to attract new investors are somehow weak and there is a need that government should invite the investment foreign exchange earning sector and other sectors simultaneously.

Research on the influence of feelings on investors’ decision making process and equity pricing conducted by Brain Lucey and Micheal Dowling stated that investors allow the mood to influence at the time of making investment decision. But if the investor allow an irrelevant mood state to influence their judgments. There was another manner in which investor allow their feelings to influence in their investment decision and it was shown that people invest in the equity of the company based on their likes or dislikes (Brain Lucey, 2005). Investment decisions and outcomes often entail a myriad of emotions. The authors examine overconfidence and its effect on investment behaviour. The authors show that overconfident investors tend to trade in greater volumes and exhibit stronger disposition effect. Previous research has shown disposition effect to be an outcome of loss aversion and lack of self-control, and this article shows that the disposition effect is also caused by emotions such as ‘pride’ and ‘shame’, which shows up to a greater degree in overconfident people (Jang, 2012).

Assessing the financial literacy and investment choice decision, Natalie, Cameron and Chrisann in their research study found that deficiencies in financial literacy is one of the cause of inertia in financial decision making and findings from international and Australian studies show that financial illiteracy is wide spread. Many of the individuals are investors who have no experience or interest in financial investment (Natalie Gallery, 2011), yet are faced to select investment option, such members make complex investment decision during their working lives that can have far-reaching financial implications on retirement benefits. Individual prefer to invest in instruments that require little or no information processing that may include analyzing financial statements and companies’ stock prices trend. They might approach the experts for their opinion but will be reluctant to do so themselves. Fear to lose is the most important cause that may prevent them to do so.

(Barber, 2004) In his study about investors’ behaviors suggested that attention based decision making has implications for wide variety of economic situation. Individual investors, when selling one consider the stocks they already own, which are typically few in numbers and can be considered one by one. But for buying it is almost impossible for most of the individual investors to evaluate the merit of every available stock. However, professional investors are less prone to indulge in attention-based purchases. They are unlikely to consider only attention-grabbing stocks. Professionals are likely to employ explicit purchase criteria.

(Ron Kaniel, 2008) The paper investigates the behavior of investors around earnings announcements using unique database of NYSE stocks. It was found that intense individual buying prior to the announcement is associated with significant positive abnormal returns in the three months following the events. Compensation for risk-averse liquidity provision seems to account for approximately half of the abnormal return, but a significant component remains that could be due to private information or skills.

Individual investors lose money around earning announcements, experience poor post trade returns, and make contrarian trade. Using simulations and trading records of all individual investors in Finland, I was concluded that these trading patterns can be explained in large part by investors’ use of limit orders. These patterns arise manually because limit orders are price-contingent and suffer from adverse selection (Linnainmma, 2010). As the age of an investor increases he may prefers to invest in shares but it’s not necessary that he invested in shares with the intension of getting the capital gain, as stated above that old citizens are risk averse so they can chose stocks as their preference investments because of high dividend payout that information asymmetry leads to adverse selection of investments. The more and detail investor will study the financial statements of the desired company better will be his investment decision.

(Dragota, 2004) The study emphasis different characteristics of Romania investors , as a result of a survey which offers information regarding some demographic characteristics, it was concluded that there is dissociation between the idea of investing on a financial market and investing in national economy, perhaps it would take a set of shares aimed at including information of the investors.

METHODOLOGY:

The study aims at applied research and designed at casual research which will be empirically tested. The approach that will be used for this study is based on primary data collection using a questionnaire. Sampling technique used is based on probability sampling. The sample size was consisted of 250 Karachi’s individual investors. These responses were collected from executives, managers, officers, housewives, workers, teachers, students, and entrepreneurs of Karachi, aging from 18 onwards, but the ethnicity of these people can be from any religion, cast or culture. For these reasons it is appropriate to use a quantitative research approach.

HYPOTHESIS:

H0: Males do not have more risk taking ability in making investment than females.

HA: Males have more risk taking ability in making investment than females.

H0: Married people do not prefer to invest in high yielding and long term investment.

HA: Married people prefer to invest in high yielding and long term investment.

H0: Reinvestment intentions have an insignificant effect in leading people to make highly secured investment.

HA: Reinvestment intentions have a significant effect in leading people to make highly secured investment.

H0: Openness to experience is not directly related to propensity to risk.

HA: Openness to experience is directly related to propensity to risk.

H0: Financial statement analysis is significantly unimportant in lowering information asymmetry.

HA: Financial statement analysis is significantly important in lowering information asymmetry.

H0: Reinvestment intentions are not positively correlated with investment level.

HA: Reinvestment intentions are positively correlated with investment level.

H0: Accounting information is not directly proportional to risk aversion.

HA: Accounting information is directly proportional to risk aversion.

H0:Investor age and their preference investment in shares have imperfect relationship.

HA: Investor age and their preference investment in shares have negative relationship.

H0:Consumption level and risk aversion are not negatively correlated to each other.

HA: Consumption level and risk aversion are negatively correlated to each other.

INVESTOR’S AGERESEARCH MODEL:

MARITAL STATUS

OPENNESS TO EXPERIENCE

INVESTMENT DECISION OF INDIVIDUAL INVESTORS

FINANCIAL LITERACY

ACCOUNTING INFORMATION

REINVESTMENT INTENTION

INFORMATION ASYMMETRY

CONSUMPTION LEVEL

RESEARCH DESIGN:

Data collected for the research is primary and was gathered by distributing the questionnaire among the individual investors of Karachi. Individual investors include executives, managers, teachers, businessmen, white-collar workers, blue-collar workers, students and even housewives.

People surveyed age from 18 years onwards and irrespective of gender discrimination. Even the ethnicity of these people can be from any religion, cast or culture.

During its development, the questionnaire was tested to ensure that the only a valid sample’s responses would be used in the survey. Most questions were check-list questions in which respondents were to choose only one option. Some questions were the likert scale type, to find out how important or unimportant investors consider analyzing financial statements for investment decision.

DATA SOURCE:

Data gathered for the research is Primary and collected for the first time through questionnaire. However a little assistance was taken from the already existing journals and books on internet for determining the suitable variables, forming the questionnaire and interpreting the statistical results of the testing hypothesis.

DATA TYPE:

Data type is Quantitative and all questions in the questionnaire are close ended as the main objective of the study is to determine whether the relationship between variables exist or not? And if it exist, to what extent they are correlated and what is the statistical equation that links those variables?

RESEARCH SAMPLE:

Two hundred and fifty questionnaires were distributed through mail, e-mail and surveyed through telephone, at different educational institutions. 14 people responded in telephonic survey, 26 through different educational institutes (including students, teachers and management), 127 of the questionnaire was received back from the e-mail, and 20 were received through mail. Therefore, out of 250, 189 questionnaires were found valid for the research study.

SAMPLING TECHNIQUE:

SIMPLE RANDOM PROBABILITY SAMPLING TECHNIQUE is used where every individual aging 18 years or above has an equal chance to be selected for survey.

STATISTICAL TECHNIQUE USED:

Software SPSS (statistical package for social science) is being used for finding the statistical relationship among variables. Association Statistical Inference technique is used that includes correlation and regression. Through correlation we came to know how much variables are linked together. And through regression we find out the perfect relationship equation of dependent and independent variables, that helped us to reach to predict the ultimate cause and effect relation between variables.

RELIABILITY OF THE RESEARCH:

The reliability of the research is satisfactory by the sufficient sample size and the heterogeneity of the population that is being chosen and keeping in view other environmental variables too.

HYPOTHESIS TESTING AND DATA ANALYSIS:

HYPOTHESIS 1:

H0: Males do not have more risk taking ability in making investment than females.

HA: Males have more risk taking ability in making investment than females.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.438

.117

12.326

.000

GENDER

.057

.073

.057

.774

.440

a. Dependent Variable: RISK AVERSION / RISK SEEKING

Correlations

GENDER

RISK AVERSION / RISK SEEKING

GENDER

Pearson Correlation

1

.057

Sig. (1-tailed)

.220

N

189

189

RISK AVERSION / RISK SEEKING

Pearson Correlation

.057

1

Sig. (1-tailed)

.220

N

189

189

Significant value of 0.44 shows that we are NOT REJECTING null hypothesis and say that males do not have more risk taking ability than females even the correlation figure of 0.057 shows a very weak or negligible relation between two. The regression equation for this will be:

Y = 0.057X + 1.438

X= males, Y= risk seeking

HYPOTHESIS 2:

H0: Married people do not prefer to invest in high yielding and long term investment.

HA: Married people prefer to invest in high yielding and long term investment.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.734

.120

14.504

.000

MARITALSTATUS

.208

.072

.208

2.904

.004

a. Dependent Variable: FIXEDDEPOSIT / SHARES

Correlations

MARITALSTATUS

FIXEDDEPOSIT / SHARES

MARITALSTATUS

Pearson Correlation

1

.208

Sig. (1-tailed)

.002

N

189

189

FIXEDDEPOSIT / SHARES

Pearson Correlation

.208

1

Sig. (1-tailed)

.002

N

189

189

Null hypothesis is REJECTED as the significant value 0.004 is less than 0.05 and it is concluded that married people prefer to invest in high yielding and long term investment. Even the positive value of correlation which is 0.208 confirms a positive relation between two. The regression equation will be:

Y = 0.208X + 1.734

X= marital status, Y=high yielding and long term investment

HYPOTHESIS 3:

H0: Reinvestment intentions have an insignificant effect in leading people to make highly secured investment.

HA: Reinvestment intentions have a significant effect in leading people to make highly secured investment.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.466

.114

12.839

.000

REINVESTMENT INTENTION

-.042

.072

-.043

-.593

.554

a. Dependent Variable: FIXEDDEPOSIT / SHARES

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

-.043a

.002

-.003

.492

a. Predictors: (Constant), REINVESTMENT INTENTION

As the significant value 0.554 is greater than 0.05 therefore we DO NOT REJECT null hypothesis and concludes that reinvestment intentions does not lead people to make highly secured investment. Furthermore, correlation figure (R) of 0.043 shows that there is almost no relationship between these two variables. The regression equation is:

Y= -0.042X + 1.466

X= reinvestment intention, Y= risk aversion

HYPOTHESIS 4:

H0: Openness to experience is not directly related to propensity to risk.

HA: Openness to experience is directly related to propensity to risk.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.459

.102

14.330

.000

OPENNESS TO EXPERIENCE

.023

.033

.050

.680

.497

a. Dependent Variable: RISK AVERSION / RISK SEEKING

Correlations

RISK AVERSION / RISK SEEKING

OPENNESS TO EXPERIENCE

RISK AVERSION / RISK SEEKING

Pearson Correlation

1

.050

Sig. (1-tailed)

.249

N

189

189

OPENNESS TO EXPERIENCE

Pearson Correlation

.050

1

Sig. (1-tailed)

.249

N

189

189

Null hypothesis in NOT REJECTED as significant value of 0.497 is greater than 0.05, and it is find out that openness to experience is not directly related to propensity to risk. The correlation value of 0.05 is very weak and agrees with null hypothesis. The regression equation is:

Y = 0.23X + 1.459

X= openness to experience, Y= propensity to risk

HYPOTHESIS 5:

H0: Financial statement analysis is significantly unimportant in lowering information asymmetry.

HA: Financial statement analysis is significantly important in lowering information asymmetry.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.450

.108

13.477

.000

FINANCIAL STATEMENT ANALYSIS

.012

.032

.026

.362

.717

a. Dependent Variable: INFORMATION ASYMMETRY

Correlations

FINANCIAL STATEMENT ANALYSIS

INFORMATION ASYMMETRY

FINANCIAL STATEMENT ANALYSIS

Pearson Correlation

1

.026

Sig. (1-tailed)

.359

N

189

189

INFORMATION ASYMMETRY

Pearson Correlation

.026

1

Sig. (1-tailed)

.359

N

189

189

Significant value of 0.717 shows that we DO NOT REJECT null hypothesis and say that financial statement analysis is unimportant in lowering information asymmetry. Correlation value of 0.026 also proves almost a negligible relation between two variables. The regression equation will be:

Y=0.012X+1.45

X=financial statement analysis, Y=information asymmetry

HYPOTHESIS 6:

H0: Reinvestment intentions are not positively correlated with investment level.

HA: Reinvestment intentions are positively correlated with investment level.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

2.483

.191

12.981

.000

REINVESTMENT INTENTION

.006

.120

.003

.048

.962

a. Dependent Variable: ANNUAL INVESTMENT OF INCOME

Correlations

ANNUAL INVESTMENT OF INCOME

REINVESTMENT INTENTION

ANNUAL INVESTMENT OF INCOME

Pearson Correlation

1

.003

Sig. (1-tailed)

.481

N

189

189

REINVESTMENT INTENTION

Pearson Correlation

.003

1

Sig. (1-tailed)

.481

N

189

189

Null hypothesis is NOT REJECTED as the significant value is 0.962. Correlation of 0.003 is almost equal to zero. Hence it is concluded that reinvestment intentions are not positively correlated with investment level. Regression equation is:

Y=0.006X+2.483

X=reinvestment intention, Y=annual investment of income

HYPOTHESIS 7:

H0: Accounting information is not directly proportional to risk aversion.

HA: Accounting information is directly proportional to risk aversion.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.621

.101

15.991

.000

ACCOUNTING INFORMATION

-.031

.031

-.075

-1.025

.307

a. Dependent Variable: RISK AVERSION / RISK SEEKING

Correlations

RISK AVERSION / RISK SEEKING

ACCOUNTING INFORMATION

RISK AVERSION / RISK SEEKING

Pearson Correlation

1

-.075

Sig. (1-tailed)

.153

N

189

189

ACCOUNTING INFORMATION

Pearson Correlation

-.075

1

Sig. (1-tailed)

.153

N

189

189

Null hypothesis is NOT REJECTED as significant value is 0.307 and -0.075 correlation also satisfies that accounting information is not directly proportional to risk aversion.

Y=-0.031X+1.621

X= accounting information, Y= risk aversion

HYPOTHESIS 8:

H0: Investor age and their preference investment in shares have imperfect relationship.

HA: Investor age and their preference investment in shares have negative relationship.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.616

.096

16.760

.000

AGE

-.088

.037

-.172

-2.381

.018

a. Dependent Variable: FIXEDDEPOSIT / SHARES

Correlations

AGE

FIXEDDEPOSIT / SHARES

AGE

Pearson Correlation

1

-.172

Sig. (1-tailed)

.009

N

189

189

FIXEDDEPOSIT / SHARES

Pearson Correlation

-.172

1

Sig. (1-tailed)

.009

N

189

189

Null hypothesis is REJECTED as significant is 0.018 and correlation is -0.172, which means investors’ age and their preference investment in shares (risk seeking) have negative relationship.

Y=-0.088X+1.616

X= investor’s age, Y= risk seeking

HYPOTHESIS 9:

H0: Consumption level and risk aversion are not negatively correlated to each other.

HA: Consumption level and risk aversion are negatively correlated to each other.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.332

.116

11.442

.000

ANNUAL CONSUMPTION OF INCOME

.070

.040

.126

1.735

.084

a. Dependent Variable: RISK AVERSION / RISK SEEKING

Correlations

RISK AVERSION / RISK SEEKING

ANNUAL CONSUMPTION OF INCOME

RISK AVERSION / RISK SEEKING

Pearson Correlation

1

.126

Sig. (1-tailed)

.042

N

189

189

ANNUAL CONSUMPTION OF INCOME

Pearson Correlation

.126

1

Sig. (1-tailed)

.042

N

189

189

Null hypothesis is NOT REJECTED as significant value is 0.084 and 0.126 correlation also shows that consumption level of income and risk aversion are not negatively correlated to each other.

Y=0.07X+1.332

X= annual consumption of income, Y= risk aversion

CONCLUSION:

In this study factors influencing the individual investor’s behavior were examined. Quantitative research was conducted to determine the relationship between desired explanatory and response variables. The independent variables include; gender, marital status, age, financial literacy, openness to experience, use of accounting information, reinvestment intentions, importance of analyzing financial statements and investment and consumption level of people that might affect the investment decision of any individual.

The obtained results from hypotheses show that, gender does not affect risk taking ability of any individual. Even women have the same risk seeking potential as males have. Secondly married people prefer to invest in long term investment so that they can have enough money for their children in the future and for their life after retirement. Mostly people in Karachi invest with the prime objective of reinvestment but that does not mean that they will always prefer to invest in highly secured investments like fixed deposits and government bonds, instead they will prefer to invest in risky instruments like shares to earn higher profits in little time and will reinvest in the desire of making it more.

However, hypothesis proves that as the financial literacy of a person increases his risk taking capability increases, as analyzing financial statements clues the investors which company can give better capital gain. However hypothesis related to experience and propensity to risk says that there is no direct relation between investors’ experience and his propensity to risk. He might go for the secure investment as his experience increases.

Study also proves statistically that accounting information and risk aversion are not in direct relationship, that is as person’s accounting information increases he prefers to invest in risky investments, it may be investor accepts to get risk but is not ready to wait or lose time. Usually new comers in the market or the people with accounting and financial information are found with this concept.

Survey statistics show high response who say that information asymmetry leads to adverse selection of investments. To overcome this problem it was suggested that information asymmetry can be lower by analyzing more and more financial statements. The more and detail investor will study the financial statements of the desired company better will be his investment decision. However, hypothesis test shows that financial statement analysis does not lower information asymmetry as they might be window dressed to attract investors. Furthermore, it only shows the financial position of the company compare to its past financial positions; they do not provide any information about companies’ competitive strength and their progressive opportunities.

Analysis of relation between age and preference investment in shares shows that both are in negative relation. As the age of an investor increases he might not prefer to invest in shares as they are highly risky investments and old age and retired people usually become risk averse as they do remain at the stage where they can afford to invest in highly risky instruments.

Reinvestment intentions are not correlated with people’s investment level, people might invest with the aim of getting more income for consumption and as hypothesis test proves that consumption level and risk aversion are positively related that is as people’s consumption will increase they will become more risk averse so that they can have money for themselves for sure.

RECOMMENDATIONS:

For those who are willing to choose this topic for further research should conduct the survey of other cities of Pakistan as well. Furthermore other variables like demographics, moods, investor’s education and investor’s profession must be tested as they are also the other important variables that may influence individual investor behavior.

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