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Literature Review on Individuals' Investing Behaviour

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Literature Review concerned with Individuals' Investing Behavior


This chapter presents previous literatures and empirically finding concerning the topic of individuals investing behavior. The study acknowledges that a comprehensive literature review about individual investing decision in general is beyond the scope of this study, instead, the results of some recent empirical studies will be highlighted. Reviewing previous finding reveals that a substantial amount of attention has been given to institutional investing behavior, while less attention has been considered individual investment behavior, which t is the emphasis of this study. The chapter highlights various factors that affect people decision when investing in stock market. At the end of this chapter, the study presents the research model, which will be investigated in the next chapter.

According to Ariyo (2007), Investment classified into two groups; financial and Non-financial. Financial Investment refers to interest bearing or dividend yielding assets such as stocks, bends, shares and other forms of securities, traded in the stock market. On the other hand, Non-financial investment refers to buildings, equipment and machinery investment or what is generally described as real investments. The currents study only considered the financial investment of individuals who invest or intent to invest in the stock market. The primary objectives of this study are to investigate various factors that affect the investment decisions of individual. To achieve this purpose, the chapters will discuss the financial market in Gulf region in general and the state of Kuwait in specific, then discuss various literatures related to the antecedents of investing decision making style of individuals.


The financial markets in most of Gulf Cooperation Council (GCC) (Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and United Arab Emirates), have grown rapidly throughout the last decades due to various factors such as deregulation, globalization and advances in information technology. During this epoch, the financial markets in Gulf region have significantly integration among themselves. Market integration is a situation where there are no barriers such as transaction costs, legal restrictions and taxes against the trade in foreign assets or the mobility of portfolio equity flows (Simpson and Evans, 2004).

Studies has examine the financial integration among the GCC stock and reported that Saudi Arabia and Kuwait markets are the major drivers of the other GCC markets (Simpson and Evans, 2004; Johansen, 1991). Previous studies indicated that the strong economic corporation and policy coordination among GCC would indirectly link their stock prices over time. Moreover, the development of stock markets would enhance the degree of integration among countries (Masih and Masih, 2002 and Choudhry et al., 2007).

It is notable that the stock markets in the GCC region have considerably developed over the last 20 years. Several factors have contribute in enhancing the stock market development and investment volume, for example higher economic growth, financial and economic stability, stock market reform, privatization, financial liberalization and new institutional framework for investors. The financial markets significantly enhance the GDP of GCC to reach more than US$ 800 billion at the end of 2007 (http://www.gccsg.org/index.php).

In spite of the all these development, the stock market of GCC region remain relatively small when compared with developed and emerging stock markets (e.g. USA, Europe). Related to Morgan Stanley Capital International (MSCI), the stock markets of GCC are classified as frontier markets (www.mscibarra.com). MSCI deemed the stock markets of GCC as relatively small and illiquid. However, GCC stock markets have significantly change and to be more attractive with lower restrictions on foreign ownership and increased liquidity. This change has encouraged not only institutions but also individuals all over the world to participate and invest in the stock market. Table 2.1 shows the foreign investment ceiling for listed stocks in GCC markets.

Table 2.1: Foreign Investment Ceiling for Listed Stocks in the GCC Markets


Foreign Investment Ceiling


49% in general; 10% for a single entity; some banks & insurance companies are 100% open to

foreign ownership; 100% in general for GCC nationals


49% in general


Up to 70% with some restrictions at company level; restrictions may differ for GCC nationals


25% in general

Saudi Arabia

25% for GCC nationals, other foreign investors may access market via mutual funds managed by

Saudi banks

United Arab


49% in general, different restrictions may apply to individual companies; 100% for GCC nationals

with company's approval

Source: Standard & Poor's Global Stock Markets Fact book, (2008)

Recent figures revealed that Kuwait stock market has the largest number of listed companies (204 companies in 2008) as shown in table 2.2. Investors both individuals and intuitions have various choices of listed companies to invest their money. Oman stock market has the smallest number (only 43 companies). The total number of listed companies in the GCC stock markets reached 676 at the end of 2008 with a 5 percent increase compared to that at the end of 2007.

Table 2.2: Main Stock Market Indicators in the GCC Countries


Number of listed companies




















Saudi Arabia




United Arab Emirates







Source: Securities and Commodities Authority, Annual Report, 2008, UAE

The following section discusses various factors that affect the investing decision style of individuals.


In their study, Kadiyala and Rau (2004) revealed that investors usually reaction to corporate accounting information event announcements. They concluded that accounting information such as financial statements, expected corporate earnings and past performance of stock found to be greatly affecting investor decision to invest in stock market. Investors appeared to not investing in stock market if accounting information was not available to them.

Prior literatures indicated that financial statements represent one of the most important sources of information for investors (Kadiyala and Rau 2004; Dempsey et al., 1997). Related to Han et al. (1992) investors emphasis on the accounting information because it helps them “to revise their expectations of future outcomes” (p. 63). Similarly, Bird et al. (2001) reported that accounting information helps investors in predicting future earnings in Australia and the UK. Thinggaard and Damkier (2008), suggested that financial statements found to be important to investors to perceive the variation of stock market returns in Demark. Numerous literatures has been documented showing that accounting information of companies such financial statements, earnings-to-price ratios, book-to-market ratios are associated paramount important to investor in order to invest in financial stock market (Bird et al; 2001; Thinggaard and Damkier, 2008).

Moreover, literatures and studies suggested that accounting reports are considered by investors as the most essential sources of information for investment decisions (Mirshekary and Saudagaran, 2005; Al-Razeen and Karbhari, 2007; Al-Attar and Al-Khater, 2007; Al-Abdulqader et al., 2007). Conversely, Naser et al. (2003) reported that individual investors rank the annual report as the second most important source of information, following direct information from companies. Moreover, they reported that annual reports are the main source of information that institutional investors rank. Similarly, Al-Abdulqader et al. (2007) concluded that institutional investors use annual reports more than individual's investors in Saudi Arabia.

In his study, Ariyo (2007) stressed that accounting information such as accounting data or ratios is the most important factor that investors relay their investment decision. Kadiyala and Rau (2004) revealed that accounting information should cover all aspects of the organization assets and liabilities both documented in long-horizon return. However, Nagangan et al. (2005) reported that cultural differences may account for the differences of perception of the importance of accounting information. Related to previous literatures, the study develop the following hypothesis:

H1: Accounting information has positive influence on individuals decision-making style in Kuwaiti stock market.


Previous literatures suggested that economic conditions affect investing decision of investors. For example, Merikas et al., (2003) have modified survey to analyze factors influencing the investing decision of Greek investors on the Athens Stock Exchange. The results of their study suggested that investors related their stock investment decisions on economic criteria combined with other diverse variables. In their study, they rely did not relay on a single integrated approach, but rather on many categories of economic factors such as local economic indicators and expected Losses in international financial markets. The results of their study revealed that investors in the Athens Stock Exchange (ASE) relay their investment decision on economic factors.

Economic conductions play a critical role in financial markets. Economics Good economic facilitates the price discovery process, enables investors to share financial risks, and ensures that corporations can raise funds needed for investment (Foster and Viswanathan, 1993; Holthausen and Verrecchia, 1988). Several studies confirmed that stock price and trading volume will be affected by economic conductions both locally and internationally (Foster and Viswanathan, 1993; Holthausen and Verrecchia, 1988). Related to previous literatures, the study develop the following hypothesis:

H2: Economic conditions have positive influence on individuals decision-making style in Kuwaiti stock market.


Related to economic theorists, individuals are assumed “rationally” when buying and selling stocks (e.g. Adam Smith, 1776). Therefore, stock the prices should precisely present the values and will only move up and down when there is unexpected news. Thus, economists have deemed financial markets as stable, efficient, and the overall economy tends toward “general equilibrium” (Adam Smith, 1776). However, in reality this does not imply in our contemporary stock market, Shiller (2000) revealed that individual investors do not think and behave rationally.

In his study, Shiller (2000) explained that investor's behaviors relay on various subjective and personal factors, for example, investor perceptions, attitudes and emotions (e.g., greed and fear). In other words, we can say that individual investors are mislead by their emotion, subjective judging and the whims of the decisions, over and over again form irrational expectation of future performance of investment companies and overall economy such that stock prices swing (Larrick, Boles, 1995).

In their study, Malmendier and Shanthikumar (2003) investigate the personal subjective of investor on their investment decision style. Their study primary answers the question of whether investors are naïve when they decide to invest in stock market? They reported that individual's investors greatly influence by their feeling, perception, and emotion. Individual's investors religions, perceptions, attitudes, and other personal factors significantly explain the decision investment style of small investors.

Moreover, Hodge (2003) has analyzed investor's perceptions toward the importance of earnings quality, auditor independence, and the usefulness of audited financial information of their investing companies. He reported that investors rarely considered audited financial statements and fundamental analysis of those statements when making investment decisions. According to Kahneman et al. (1999) and Hirshleifer (2001), individuals behavior of buying and selling stock of are most likely to be “cognitive illusions”, since people revealed that they like becoming rich and famous or being able to get out of the market before a bubble breaks. Related to previous literatures, the study develop the following hypothesis:

H3: Subjective/Personal factors have positive influence on individuals decision-making style in Kuwaiti stock market.


Previous literatures suggested that advocate recommendation has greatly influence people division to invest in stock market. For example, Krishnan and Booker (2002) investigate various factors influencing the decisions of individual's investors, and they concluded at a short-term decision, broker recommendations found to influence investment decision to hold or sell a stock.

In his research, Walther (1997) revealed that institutional investors are professional investors with great ability to analyze market information. Consequently, the recommendation of investment institutions has become an essential reference for individual investors. Krishnan and Booker (2002) revealed that family recommendation, friend's recommendations and co-worker recommendation are correlated with investor decision-making. Similarly, in their study, Nagy and Obenberger (1994) reported that the recommendations of brokerage, individual stockbrokers, family members and co-workers go largely unheeded.

According Maheran et al. (2003), people decision on stock investment are most likely to base on the form of recommendations. In their study, the revealed that most of investors make their first purchase based on the recommendation of a relative, co-workers or friend. Moreover, Maheran et al. (2003) revealed that the first trade is usually for a small amount of investment, the results of their study reported that if it is successful, the investor typically follows the friend's or relative's for next recommendation and buys more stock shares than the first time. Finally, the explained that this cycle comes to an abrupt end when the investor losses a considerable portion, if not all money invested. Related to previous literatures, the study develop the following hypothesis:

H4: Advocate Recommendation has positive influence on individuals decision-making style in Kuwaiti stock market.


Nagy and Obenberger (1994) investigate the antecedent of small investor behavior by using quantitative research design. They developed a survey that included (34) questions whether individual's investors uttered their perception toward the importance factors that affect their investment decision. The results of their study revealed that wealth personal financial needs and maximimization criteria are important to investors. The study also reported that even investors invest in stock market to minimizing risk, diversification needs, and to ease obtaining borrowed funds. Related to previous literatures, the study develop the following hypothesis:

H5: Personal Financial Needs have positive influence on individuals decision-making style in Kuwaiti stock market.


Previous literatures have revealed the importance of the availability of neutral information about the investment firms. For example, Epstein (1994) investigated the increasing demand for social information by individual investors. For example, Epstein (1994) revealed that the availability of annual reports to corporate and other information about the investment firm is a paramount important to small investors. Moreover, he stressed on the increasing demand for information about product safety and quality, and about the company's environmental activities. Furthermore, small investors want the investment firm to keep them update with reports on their corporate ethics, employee relations, community involvement and any other activities or news.

In their study, Arbel and Strebel (1983) point out that the absent of netural information lead investor to follow rumors and abide by the herding instinct. The availability of information request by investors to assist their environmental scanning and strategic decision making, (McGee and Sawyerr, 2003; Elenkov, 1997; Kumar et al., 2001; Subramaniam et al., 1994; Daft and Weick, 1984). According to Kent et al. (2001), the availability of information about investing firms is paramount important since investors were very much influenced by historical performance of the stock price. Similarly Daniel, Hirshleifer, Teoh (2002) stressed on the importance of availability of information that contribute in investment decision style. Related to previous literatures, the study develop the following hypothesis:

H7: Availability of Neutral Information has positive influence on individuals decision-making style in Kuwaiti stock market.


Numerous literatures suggested that corporate image and reputation is an important antecedent to investment decision of investors (Beal, 2000; Daft and Weick, 1984; Ebrahimi, 2000; Elenkov, 1997; McGee and Sawyerr, 2003; Garg et al., 2003; Suh et al., 2004; Yunggar, 2005). Studies confirmed the relationship between investment decisions and firm's performance and image (McGee and Sawyerr, 2003; Garg et al., 2003; Suh et al., 2004), the study develops the following hypothesis:

H7: Corporate Image and reputation has positive influence on investment decision making style of Kuwaiti investors.


This chapter has reviewed various literatures and studies, which highlights the antecedents of investing decision of investors. Due to its extensively reviewed, the chapter considered the following factors; Accounting information, Economic Conditions, Subjective and Personal perception, Advocate recommendation, Personal financial needs, Availability of Neutral Information and Corporate Image and Reputation. The main findings of the abovementioned studies are as follows:

Accounting information is important for investor to take their investing decisions.

Economic conditions found to have great influence on investor's decision making.

Subjective/personal factors found to influence investors decision-making style.

The advocate recommendations of stockbrokers, friends, family members and co-workers go largely unheeded.

Personal financial needs reported as one reasons of why individuals their money in stock market.

Investors exhibit a strong demand for neutral information about the Investment Company, its product safety and quality, and about the company's environmental activities.

Finally, corporate image and reputation has been considered as an important antecedent to investment decisions in stock market.


Referring to previous literatures presented in this chapter, the current study develops the following research model. The figure 2.1 shows the Theoretical framework that links these factors to Investment Decision in Kuwait Stock Market. The model presents various antecedents that influence individual's investment decision in the stock market. these antecedents are; Accounting Information, Economic Conductions Factors, Subjective/Personal Factors, Advocate Recommendation, Personal Financial Needs, Availability Of Neutral Information And Corporate Image And Reputation.

Figure 2.1: Theoretical framework

Investment Decision in Stock Market

Corporate Image and Reputation

Accounting information

Availability of Neutral Information

Advocate recommendation

Personal financial needs

Subjective and Personal perception

Economic Conditions

The following chapter will discuss and investigate this model depth, and presents the required methodology to measure these variables.

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