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  • Published on: 14th September 2019
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1.1  Introduction

    An investment, be it in stocks, real estate or other businesses, entails the commitment of money or a period during which it is expected to gain substantial returns. However, there some factors including the expected inflation, political upheavals, economic crises and other factors that may lead to investors counting losses instead of the anticipated profits. This means that any form of investment amounts to risking one's funds expecting that there will be significant returns, but with the knowledge that losses are also possible in any investment. For this reason, this study is designed to give insight into the reasons that impact the investment decisions of people, particularly in stock markets.

1.2 Motivation of the study:

    An individual's investment decision is determined by the outcome of the tradeoff between immediate expenditures and deferred expenditures with the aim of gaining greater investment and expenditure strength in future. This study is motivated by the immense urge to understand the interplay of factors that influence the decision-making processes that individuals in the United Arab Emirates (UAE) undertake when choosing whether or not to invest in the stock market. This constitutes the main drive for conducting this research.

Our Goal: Helping the individual investors to know the factors affect their behavior in UAE stock market to control their choices to achieve better profitability.

 1.3 The Research Problem

    The conventional financial theory postulates that investors are rational wealth-maximizes who follow basic investment rules to determine the most viable investments depending on their risk-return assessments. However, the level of risk that individual investors are ready to make varies depending on some factors. While some factors have been identified to account for individual investment behaviors, there is still inadequate literature on the influence that financial knowledge, expert recommendations, personal financial needs and future goals, personal attitude, and current political and economic effect on individual investor behavior in the stock exchange. For this reason, this research proposal is aimed at investigating these factors and determining how they influence the investment behavior of individuals in the United Arab Emirates.

1.4  The Objectives of the Study

    The broad objective of this study is to investigate the factors influencing individual investor behavior in the stock exchange market of the United Arab Emirates. The following are the objectives of the research:

i) Determine the impact of financial knowledge on individual investor behavior

ii) Investigate how expert recommendations affect individual investor behavior

iii) Establish how personal financial needs and future goals impact individual investor behavior

iv) Determine how Personal attitude influences individual investor behavior

v) Investigate how Current political and economic events affect individual investor behavior

1.5  Hypothesis

    The following are the hypotheses for this research proposal:

i) H0: Financial knowledge is positively correlated to individual investor behavior

   H1: Financial knowledge and individual investor behavior are not positively correlated

ii) H0: Expert recommendations and individual investor behavior are directly related

    H1: Expert recommendations and individual investor behavior are in an inverse relationship

iii) H0: Personal financial needs and future goals and individual investor behavior are in a direct relationship

    H1: Personal financial needs and future goals and individual investor behavior are in indirect relationship

iv) H0: Current political and economic events and individual investor behavior are positively correlated

    H1: Current political and economic events and individual investor behavior are negatively correlated

1.6  Theoretical Conceptual Framework

    To give an insight into the various factors that influence individual investor behavior, this research proposal will delve into two theoretical frameworks: Prospect Theory and the Theory of the Mental Accounting.

   1.6.1 Prospect Theory

    Prospect theory is a behavioral economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome. Also, we can say that human beings express certain degrees of emotions towards gains and completely different emotions towards losses.

It further suggests that people are more stressed by anticipated losses than they are fascinated by similar amounts of gains.

 A good example of this theory is that a stock broker or investment consultant is likely to receive more calls when they report a significant loss in their clients' investment portfolios than when they report an equal amount of gain. A is seemingly more significant than a gain of a similar amount. The prospect theory also elaborates why investors stick with losing stocks by explaining that people are more often than not ready to take more risks aimed at avoiding losses than they can make to realize gains. It is for this reason that investors are usually reluctant to dispose of their losing stocks in the hope that the stock value will bounce back.

The theory was created in 1979 and developed in 1992 by Daniel Kahneman and Amos Tversky as a psychologically more accurate description of decision

    1.6.2 Theory of the Mental Accounting

    The theory of mental accounting postulates that people have a tendency towards placing certain events into specific mental compartments, and the diversity among these compartments effectively impacts their behavior more than the actual events. In the area of stock investment, the theory of mental accounting is best demonstrated by the hesitation of an investor to buy an investment that has had a bad history of perpetual loss of value, or the reluctance to sell an investment that once had huge gains which have now declined to only modest or extremely low gains. In the event of a bull market run, individual investors are expected to get used to significant gains, but when the market deflates their net worth, they become more reluctant to sell their stocks at smaller profit margins. This is because their investor behavior is influenced more by the difference between the past huge and the current miniature gains than by the current event of plummeting stock value, yet they could still make some profit. The investors create mental compartments recording their gains during the bull market run, which makes them choose to wait until another gainful period comes along.

1.7  Significance of the Study

   There is only little research work that has been accomplished in the area of individual investor behavior in the stock exchange market, especially in the U.A.E. This study is significant because it will add to the body of knowledge regarding the factors that influence individual investment behavior in the Abu Dhabi Securities Exchange, Nasdaq Dubai, and other sectors of the economy. It will also avail reliable information on the considerations that people undertake during the decision-making process that leads to investment in certain stocks and not others. Moreover, this study will serve as a reference material for future researchers and decision makers interested in understanding the reasons behind particular individual investment behaviors.

1.8  Scope and Limitation

   The scope of the proposed research will cover the influence of financial knowledge, expert recommendations, personal financial needs and future goals, personal attitude, and current political and economic events on individual investor behavior. It will be limited to the investment behavior in the stock market alone, and the U.A.E. will be the primary area of study. The respondents for this research will be individual portfolio holders in Abu Dhabi Securities Exchange and Nasdaq Dubai without the inclusion of any other stock or financial market. However, it is expected that the findings of this study will be generalizable to other individual investors in other sectors of the economy and other stock markets around the world.

3.1 Research Methodology

   This chapter explains the method we used to analyze the data to reach the desired conclusion and the study objective

3.2 Research Design & Method

This research will combine the qualitative and quantitative research methodologies. For collecting primary data for the research, a survey research design will be adopted. The independent variable in this research will be the individual investor behavior while the dependent variables will include financial knowledge, expert recommendations, personal financial needs and future goals, personal attitude, and current political and economic events.

3.3 Sample and Sampling Techniques

The random sampling design will be used in this research to pick a sample of 150 respondents from the diverse portfolio of individual investors in the Dubai Financial Market, Abu Dhabi Securities Exchange, and Nasdaq Dubai. This sample size is expected to be representative of the individual investors in the U.A.E.

3.4 Respondents of the Study

The respondents in this study will comprise of the target population of Dubai residents and non-residents who have active portfolios in the Dubai & Abu Dhabi Stocks Exchange either through stock brokers or investment banks. The study participants will be picked randomly.

3.5  Data Gathering Instruments

Primary data will be collected using a research questionnaire that will be given to the respondents personally. The questionnaire will be self-administered, meaning that each respondent will answer all the questions without the assistance of the researcher or research assistant. The questionnaire will be divided into five sections, with each section addressing each of the variables under investigation.

The validity and reliability of the research instrument will be tested by conducting a pilot study in which the questionnaire will be administered to 5 respondents to have them answer the questions and make suggestions for improvements. Unclear questions will be restructured, and the questionnaire will be modified as necessary to guarantee collection of valid and reliable data to meet the objectives of this study and answer the research questions.

3.6 Treatment of Data

The completed questionnaires will be collected for data processing, coding, tabulation, and analysis. Statistical analysis will be conducted using Microsoft Excel software, and the analyzed data will be reported using descriptive statistics including means, frequencies, and standard deviation.

3.7 Research Questions

    To address the research problem, this study intended to answer the following questions:

1. Does financial knowledge influence individual investor behavior, and how important is its effect on the respondents' behavior?

2. Do expert and non-expert recommendations affect individual investor behavior, and what is the importance of such recommendations concerning investment behavior?

3. Do personal financial needs and future goals impact individual investor behavior? And what is the relative importance

4. Determine how personal attitude influences individual investor behavior

5. Investigate how current economic events affect individual investor behavior

3.8 The Questionnaire

    For the purpose of this study, a structured questionnaire was developed to investigate the factors that influence the behavior of individual investors in the UAE stock markets. The questionnaire items were divided into five main variables including financial knowledge, expert and non-expert recommendations, personal financial needs and future goals, personal attitude and current economic events. These variables will be examined through this questionnaires to determine their relative importance regarding their influence on individual investor behaviors. The questionnaire has various items examining financial knowledge and current economic events, expert recommendations, personal financial needs and future goals, and personal-image-corporate image relationship. The study participants were asked to indicate whether the statements were true or false and to express their level of agreement with each of the items using a seven-point Likert scale.

It is also important to note that this research project, unlike previous studies, factors in the religious beliefs of the participants as a major variable that would affect their investment behaviors. In this case, it is considered that the UAE is entirely a Muslim society with conservative investment practices. Their religion prohibits Muslims from depositing their money in conventional banks - Riba-based banks- because earning of interest on such money is Haram - lord- according to the Holy Quran.  

3.9 Data Collection

The data collection process involved the random distribution of the 150 questionnaires to respondents investing in the UAE. There are three stock exchanges operating in the UAE namely Dubai Financial Market (DFM), Abu Dhabi Securities Exchange (ADX) and NASDAQ Dubai. Fifty questionnaires were administered to fifty respondents in each of these stock exchanges. As mentioned in the section on sampling

The Dubai Financial Market (DFM) is a stock exchange based in Dubai that lists companies based in the UAE and few companies based in other countries in the MENA region through dual listings. The countries from where these companies originate are Bahrain, Kuwait, Sudan, and Oman, most of which allow foreigners to invest in their shares. DFM was under the full ownership of the Dubai government up to November 2006 when an Initial Public Offering (IPO) made it into a public joint-stock company in which 80% shares were acquired by Borse Dubai (owned by the Dubai government) while 20% shares were sold to the public.

Abu Dhabi Securities Exchange (ADX) is also a UAE-based stock exchange, which, like DFM, mainly lists local UAE companies. ADX and DFM are regulated by the Securities and Commodities Authority (SCA), which has the authority to formulate and impose standards and rules that the stock exchanges should comply with. ADX has more companies in its listings compared to DFM, although its trading volume of the much less than that of the DFM.

NASDAQ Dubai lists both regional and international shares for companies in the Middle East. Through this exchange, regional issues can access both local and international investments, and international issues get access to the regional investments through primary and dual listings. NASDAQ Dubai was established to deal mainly with the trading of international stocks. The region covered by NASDAQ Dubai includes the entire UAE, the wider Middle East, the whole Gulf Cooperation Council (GCC), Turkey, North Africa and the Indian sub-continent. The majority shareholder in NASDAQ Dubai is Dubai Financial Market (DFM), which bought two-thirds of the shares from NASDAQ OMX Group and Borse Dubai in May 2010, leaving Borse Dubai with one-third of the shareholding. Located in the Dubai International Financial Center, NASDAQ Dubai is a financial free zone and operates under the regulation of the Dubai Financial Services Authority.

3.10 Reliability of the Measures

The reliability of the measures used in this study was assessed using the Cronbach's alpha, which allows researchers to assess the reliability of the different sets of variables. It estimates the level of variation in the scores of the different variables and shows how much of this variation can be attributed to chance or random errors. The rule of the thumb is that should the coefficient be higher than or equal to 0.5, it is considered as acceptable as it indicates a good level of construct reliability. For this study, the overall Cronbach's alpha for the five categories of variables was found to be 0.687. For the five categories of variables, namely, financial knowledge, expert and non-expert recommendations, personal financial needs and future goals, personal attitude and current economic events, the Cronbach's alpha was found to be 0.743, 0.719, 0.701, 0.626 and 0.649 respectively. This is an indication that the categories were reliable and suitable for use in this study.

Data Analysis

    This chapter details the results of this study. It starts with a review of the demographic statistics of the participants, and then moves on to report the research findings of how individual investment behavior in the UAE stock market is influenced by financial knowledge and current economic events, expert recommendations, personal financial needs and future goals, and personal-image/corporate-image relationship. The data collected through the questionnaire was examined and cleaned in preparation for analysis. This led to the elimination of 4 questionnaires due to the incompleteness of the answers, leaving a total of 142 questionnaires, which represented an effective and suitable response rate of 94.6%.

4.1 Demographic Profile of the Study Participants

 - As far the age distribution among the population is concerned, this study classified the respondents by various conventional age brackets representing the local investors in the UAE stock market. Out the study sample, 16 (n=23) per cent were aged between 18 and 35 years, 32 per cent (n=47) were aged between 36 and 45 years, 38 per cent (n=55) were aged between 46 and 65 years, while 14 per cent (n=20) were at least 66 years old. This is well demonstrated by the first pie chart in Figure 1 below.

- The second pie chart – Figure 2 - shows the distribution of the male and female genders among the study population. Out of the study sample, 86 percent (n=126) of the respondents were male, whereas only 14 percent (n=20) of the study sample were female.

- The participants reported appreciable education levels. All of them had attained at least secondary school education level, with 6 percent (n=9) having reached secondary school level only and 19 percent (n=28) having acquired diplomas and/or higher diplomas in various professions. Twenty-nine percent (n=42) had reached bachelors' degree education level while only 5 percent of the respondents (n=8) possessed graduate level education qualifications as shown in Figure 3

- Concerning occupation – Figure 4-, 39 percent (n=57) of the study sample were employed in the public sector, whereas 47 percent (n=68) were employed in the private sector. For the remaining respondents, 14 percent (n=20) were self-employed or ran private businesses. None (n=35) of the participants reported to be jobless

- As far as their monthly earnings were concerned, only 9 percent (n=6) reported to be earning less than AED 5,000. 23 per cent (n=33) earned between AED 6,000 and 20,000 while 24 per cent (n=35) earned between AED 20,000 and 40,000 on a monthly basis. Thirty-one per cent (n=45) earned between AED 41,000 and 60,000, with 13 percent (n=19) of the participants earning over AED 61,000 every month as shown in Figure 5

4.2 Factors Influencing Investor Behavior

Further analysis of the research data is shown in Table 1 below, where the descriptive statistics indicate the means and standard deviations of the five categories of factors investigated in this study for their level of influence on individual investor behavior.

Table 1: The means and standard deviations for the factors influencing investor behavior

From the findings in Table 1 above, it is observable that all the calculated average scores for each of the five categories of variables examined in this study were found to be greater than 4 out of the maximum possible score of 7 points, based on the 7-point Likert scale used in the questionnaire. This is an indication that there was a positive correlation between the all the five categories of variables affecting investor behavior.

In the order of relative importance and level of influence on individual investor behaviors, the five categories of variables were ranked as follows: personal financial goals and needs, financial knowledge, expert recommendations, personal-image/corporate-image relationship, andneutral information. This was an indication that for the respondents of the study, personal financial goals and needs comprised the most influential factor in shaping their investor behavior, whereas neutral information was the least influential factor in determining their investment habits and decisions.

   Further data analysis was done to determine the relative importance of each of these factors in determining the investment behavior of the study participants as far as their investment decisions were concerned. This was done by determining the level of influence of each variable in determining the behavior of individuals with regard to stock market investment decisions and actions. A frequency distribution table was used in this study to represent the data findings as shown in Table 2 below.

Further analysis of the findings was done to sort and rank the factors regarding the factors with the least level of influence on the investment behavior of UAE residents. It was observed that most of the study variables that got rated by the participants as important were typical wealth maximization criteria including “get rich quick”, and “expected corporate earnings.” Importantly, this finding is consistent with the findings of Merika et al. (2003) who also found expected corporate earnings and getting rich quick schemes to have a less significant influence on people's behaviors. The wealth maximization criteria contain four main factors that were also seen to affect the investment behavior of people in the UAE. These factors included past performance history of a particular stock, the previous dividends paid to shareholders, the condition of financial statements and the expected dividends. The research indicates that these factors got the ranking of 4, 7, 8 and 9 respectively.

There are other factors also affected the behavior of individual UAE investors to a significant extent, including the high interest of the UAE individual investors in the marketability of a stock. This is expected to influence the policies that should be adhered to by business companies listed in the three stock markets based in the Dubai emirate. For instance, to increase the marketability of the stock, a listed company would need to review frequently and adjust accordingly the relationship between the price and the demand of their stock. In case the stock is too high, this would bring difficulties in marketing and selling it. It is recommended that companies can effectively adopt a policy that permits stock splitting to make costly stocks more marketable.

It is also important to note that government holdings form a significant factor influencing the stock investment behavior in the UAE. It was observed that over 50 per cent of the study participants considered this factor as the most influential element of their investment behavior. Moreover, it is critical note take note of the fact that there are a notable number of listed companies in which the UAE government owns some significant stake, which acts as a significant source of motivation and confidence for individuals to invest in. Also, it is notable that the respondents indicated that the creation of the organized financial markets in the UAE was a significant motivating factor leading them to invest in stocks. More than 50 per cent of the respondents reported that this factor was the most important determinant of their investment behavior, thereby revealing the importance of the establishment of the formal financial and stock trading markets, which did not exist before the year 2000.

On the flipside, it is important to take note of the observation that some of the factors that were investigated had the lowest level of influence on the investment behavior of UAE residents. For instance, there were only 26 (18.3 per cent) out of all the study participants who reported that religious reasons had a significant influence on their behaviors concerning investment in stock markets. This was an unprecedented finding considering that it was expected that almost all the respondents would point out religion as a major determining factor when it came to making investment decisions and developing particular individual investment behaviors. This expectation was informed by the fact the being a Muslim society; the UAE residents were expected to consider their religious law that prohibits them from storing their money or investing in channels such as conventional banking systems where the money earns interest.

Moreover, this research made another unexpected observation about the influence of family opinions and recommendations about investment in stock markets. In this case, only 13 respondents, equivalent to 9 per cent of the total study participants, considered the recommendations of their relatives as a major factor in the determination of their investment behaviors. These factors were seen to have the least effect in shaping the behavior of individual investors in the UAE.

Concerning the five categories of factor shaping the investment behaviors of the study population, it is striking to note that the most influential factors that stood as the most important determinants of the behavior were found to belong to the category of accounting information. The variables in this category, which influenced the investment behavior of the participants the most included the marketability of a firm's stock, the earnings a corporate expected in a given period, the previous performance history of a firm, the amount of dividends previously paid to shareholders, the status of a firm's financial statements, and the anticipated amounts of dividends to be paid to the shareholders of a potential investment option.

This research made it clear that companies listed in the Dubai Financial Market, Abu Dhabi Securities Exchange, and NASDAQ Dubai need to consider the findings of this survey and apply the recommendations thereof to ensure that they attract and fulfill the investment aspirations and desires of their actual and prospective investors. This is expected to attract larger investments from current shareholders and persuade more investors to put money into their companies' stocks.

It is also crucial to note that the second category of variables that was seen to have the highest level of influence, and which bears a high level of importance for companies listed in the UAE stock markets is personal-image/corporate-image relationship. This category contained the variables of getting rich quick, the reputation of a firm and the perceived company ethics of a candidate firm. These factors were found to have a highly significant level of influence in determining the investment behaviors of the UAE residents.

Furthermore, the third category of variables that was found to have a statistically significant level of influence on the investment decisions of the UAE individual investors was neutral information. This category was followed by expert recommendations in the fourth position and personal financial goals and needs in the fifth position. In essence, the investment behavior of individual investors in the UAE are mainly determined by the accounting information of a firm, self-image and corporate-image of a firm, neutral information, expert recommendations, and personal financial goals and needs.

Chapter 5

Summary, Conclusion & Recommendations

Summary, Conclusions and Recommendations

    This research project has investigated the factors that influence the individual investment behavior among the locals in the United Arab Emirates. Through a structures questionnaire, this research collected data from the study sample to determine the ways in which the various factors affect their investment decisions and action plans. The data collection process involved categorization of the variables influencing the investment behavior of respondents into five groups, namely, personal financial goals and needs, financial knowledge, expert recommendations, personal image, and neutral information.

The analysis of the collected data indicated that there were six most statistically significant factors regarding their influence on the investment behavior of individual investors in the UAE. It was observed that these factors were cited by more than 50 percent of the respondents as the most significant elements that molded their investment behaviors. Ranked by the order of their importance, the factors included the earnings of a corporation, getting rich quick schemes, marketability of stock, previous performance of a corporation's stock, government shareholding, and the establishment of organized financial/stock markets (Dubai Financial Market, Abu Dhabi Securities Exchange and NASDAQ Dubai).

On the other hand, this study found out that there were five factors that have the least level of influence in shaping the investment behavior of the respondents. These factors were cited by less than 10 percent of the respondents as significant influencers of their investment behavior. Ranked by the order of decreasing importance, the least influential factors were anticipated losses in other forms of local investments, minimization of investment risks, anticipated losses in investments made in international financial markets, opinions of relatives and the respondents' gut feeling regarding the local economy.

Regarding the five groups into which the variables were classified, the ranking of the most influential to the least influential group of factors affecting individual investment behavior in the UAE was as follows. Accounting information, the relationship between personal-image/corporate-image relationship,neutral information, expert recommendations, and personal financial goals and needs. Contrary to prior expectations, two factors were demonstrated to have an unprecedentedly low level of influence on the individual investor behavior, namely the recommendations of relatives and the influence of religion. In a nutshell, financial information, neutral information, expert recommendations and personal financial goals are the main variables that determine the kind of investment behavior in the UAE.

This research will be useful to companies listed in the UAE stock markets as it will help them make the correct adjustments to affect the investment behaviors of UAE residents in a manner that will see the most individual investors invest more money in their stocks. About the implications for future research, this study will act as reference material for future studies that need to focus on what listed companies can do to attract more individual investors and encourage larger and more consistent investment in their stocks.

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