Abstract

Investor sentiments play an important role in investors’ decisions about the investment activities in the stock market. Sometimes, investors ignore the market analysis and base their decisions on their sentiments only. Therefore, these sentiments may affect the returns of the investors. The present study evaluated the impact on these investors’ sentiments on investment decision. The researchers targeted four most prominent sentiments of the investors. These sentiments are overconfidence, glamour stock, religious beliefs and herd like behaviour. The researcher collected data from the investors trading at London Stock Exchange. The data in this study was collected through a questionnaire. The collected data was analysed through independent sample t-test, ANOVA and regression. The study finds that female and young investors are more obsessed with their sentiments. However, male and older investors quite control their sentiments during the investment. The study also finds that overconfident investors have to face negative returns from the market. Glamour stocks and religious beliefs of the investors are irrelevant in determining the returns of an investor. Herd like behaviour is quite risky, but the study has found that this behaviour is helpful in generating positive returns in the market. The study has been conducted in a developed economy. The future researchers may work on developing economies as well and comparison can also be performed.

 

 

 

Table of Contents

 

Abstract i

Table of Contents. ii

List of Tables. iv

List of Figures. v

1.       Introduction. 1

1.1.       Prologue. 1

1.2.       Background of the Study. 1

1.3.       Research Problem.. 4

1.4.       Aim of Study. 5

1.5.       Research Questions. 5

1.6.       Research Objectives. 5

1.7.       Significance of Study. 5

1.8.       Scope of the Study. 6

1.9.       Outline of Research Methodology. 6

1.10.     Delimitations of Study. 6

1.11.     Structure of the Dissertation. 7

2.       Literature Review.. 8

2.1.       Prologue. 8

2.2.       Irrational Investors and Investor Sentiments. 8

2.3.       Investor Sentiments and Stock Returns. 22

2.4.       Summary of Literature Review.. 24

3.       Theoretical Framework and Hypotheses. 26

3.1.       Hypotheses. 26

4.       Research Methodology. 29

4.1.       Prologue. 29

4.2.       Study Type. 29

4.3.       Study Context 30

4.4.       Study Participants. 30

4.5.       Study Sample. 31

4.5.1.    Sampling Design. 31

4.6.       Research Approach. 32

4.7.       Research Philosophy. 33

4.8.       Data for Study. 35

4.9.       Data Collection. 37

4.9.1.    Instrument 37

4.9.2.    Measurement Scale. 38

4.9.3.    Validity Testing. 38

4.10.     Data Analysis. 38

4.11.     Limitations of the Study. 41

4.12.     Ethical considerations. 42

5.       Results and Analysis. 43

5.1.       Prologue. 43

5.2.       Reliability Analysis. 43

5.3.       Descriptive Statistics. 44

5.4.       Independent Sample T-Test 46

5.5.       One Way ANOVA (Age) 49

5.6.       One Way ANOVA (Education) 54

5.7.       Regression Assumptions. 55

5.7.1.    Normality of Data. 56

5.7.2.    Linearity. 56

5.7.3.    Homogeneity of Variance. 57

5.7.4.    Absence of Outliers. 57

5.7.5.    Normal Distribution of Errors Terms. 58

5.7.6.    Absence of Multicolinearity. 59

5.7.7.    Regression Analysis. 60

5.8.       Findings of the Study. 63

6.       Conclusion, Implications, Limitations and Recommendations. 66

6.1.       Prologue. 66

6.2.       Conclusion. 66

6.3.       Implications of the Study. 68

6.4.       Practical Implications. 69

6.4.1.    Academic Implications. 70

6.5.       Limitations and Recommendations for Future Researchers. 71

References. 72

 

 

 

List of Tables

Table 1: Description of Variables. 28

Table 2: Reliability Analysis (Pilot Testing) 44

Table 3: Reliability Analysis (Final) 44

Table 4: Descriptive Statistics. 45

Table 5: Independent Sample T-Test 47

Table 6: Groups Statistics. 48

Table 7: One Way ANOVA (AGE) 50

Table 8: Tuckey’s HSD (AGE) 52

Table 9: One Way ANOVA (Education) 55

Table 10: Normality Testing. 56

Table 11: Linearity Testing. 57

Table 12: Test of Homogeneity of Variances. 57

Table 13: Multicolinearity Testing. 60

Table 14: Model Summary. 61

Table 15: ANOVA.. 61

Table 16: Coefficients of Regression. 62

 

 

 

List of Figures

Figure 1: Proposed Theoretical Framework. 27

Figure 2: Research Onion. 33

Figure 3: Outliers Testing. 58

Figure 4: Normal Distribution Testing. 59

 

 

1.Introduction

1.1.Prologue

The introduction is that section of the research in which the discussion over some of the important constituents of any project is discussed. In this research proposal, some of the major concerns about the problem statement that is aim, objectives, questions and background to the research problem are postulated out. Hence, this section holds a critical importance.

1.2.Background of the Study

Investment decision is very important in any of capital and equity markets. There are a number of factors that play an important role in determining the investment decision of investors. Some of these factors are external and some of them are internal to investors. External factors include market factors and economic factors; whereas, internal factors are related to the personality of investors. Personality traits of the investors, perceptions and his sentiments are also important determinants of investment decision.

Traditionally, it was assumed that markets are inefficient and investors follow a rational perspective during investment. The traditional theories of fundamental finance assume that every investor is a rational investor and investment decisions are taken on the basis of thorough statistical analysis and diversified portfolios are formulated to avoid the risk. These rationally diversified portfolios will help to achieve the equilibrium in the market. However, this situation is not prevalently observable in most of the case in different stock markets across the globe. A number of market crashes have been observed in the past. The history of the financial market is full of dramatic events in which the markets faced serious shocks and under some adverse circumstance entire markets crashed. The incidents like the Great crash of 1929, the Tronic Boom of early 1960, the Nifty Fifty bubble of 1970s and Black Monday of 1987 are some of the examples of these drastic changes. Stock prices experienced abnormal fluctuations during these events. This situation raises some serious questions regarding the validity of these traditional theories. The answers of these questions lie within the field of behavioural finance (Baker & Wurgler, 2007).

Researchers have identified that one of the major reasons behind market crashes were the irrational decisions of investors. Most of these decisions of investors are taken under the personal sentiments of investors. A rational investor performs a complete analysis including the financial statement analysis of the company and market analysis before taking an investment decision. The past performance of a company in which investor is willing to make the investment is evaluated and the future is speculated on the basis of this past performance. There can be a number of financial indicators used for the evaluation of financial performance of a company including return on equity (ROE), return on investment (ROI), return on assets (ROA), earnings per share (EPS), Earning Yield, Size of Firm, and Market to Book Value, Dividend per Share, Dividend Yield and many others. However, some time investors’ decisions become independent of these factors and his personal sentiments about the investment play the main role in decision making (Mishkin & Eakins, 2011). Moreover, sometimes the investor under-react or over-react to these indicators. This inappropriateness of the reaction disturbs the entire market. Resultantly, markets behave in an abnormal way. Some of the investors earn abnormal profits in this situation, while others have to bear abnormal losses as experienced in the events referred above (Shefrin, 2005).

Although, most of the earlier studies in financial literature were based on the assumption of market inefficiency and investor rationality, many of the researchers have followed a different perspective while studying the financial markets recently. Many of the authors are of the view that “if a market exhibits either an overreaction phenomenon or a high-PER effect, then significant substantial returns can be earned by using simple strategies” (Dahlquist et al., 2000). Trabelsi (2010) and many other researchers have provided empirical evidences regarding the role of personal sentiments of investors in investment decisions (Trabelsi, 2010).

The personal sentiments are also explained as behaviours of investors. These sentiments are discussed under the umbrella of behavioural finance. Behavioural finance deals with the psychology of investors. This field discusses that what type of psychological factors are involved in investment decisions of investors and how they affect market. The market inefficiencies because of these factors can be explained better thorough behavioural finance. It becomes more important to study the behaviour of investors, especially in a market where uncertainty is quite high. Investors may feel that other people in the market are more knowledgeable as compared to them (Fernandez et al., 2011).

It is pertinent to note while studying the investors’ sentiments that the level of risk taken varies largely among investors. All investors are not ready to take the same level of risk while trading in the market. An investor can be risk averse, risk taker or risk avoider (Liston & Soydemir, 2010; Brigham & Houston, 2013). The personal attitude greatly affects the level of risk taken by the investor (Liston & Soydemir, 2010). The investor’s confidence plays an important role here. Sometimes investors become overconfidence during investment decision, and they take the decision aggressively to earn higher returns. These investors plunge into a risky investment decision without making the appropriate analysis and getting the required level of information.

Investor sentiments provide the rationale for acceptance of overpriced share by investors. The behavioural components of the stock markets are explained by investor sentiments (Benjamin & Frank, 2011). Most of the time, investors merely take the decision on the basis of past information or some speculation made by the company or other investors (Kaustia et al., 2012). Some investors consider some specific stocks as sin stock and they are not willing to buy these stocks despite they are profitable stock (Liston & Soydemir, 2010). Herd like behaviour is also quite common (Avery & Zemsky, 1998) . Moreover, many investors merely take the investment decision about some particular company on the basis of glamorous elements involved in the company. This glamour can be found in some ads of the company or its image in the market (Hasnawati, 2010).

A number of previous studies have investigated the role of personal sentiments in their investment decisions and have proven that many of the investments decisions are influenced by the personal sentiments of investors (Trabelsi, 2010). Personal sentiments of investors are existent in many forms affecting their investment decision. They can be referred to beliefs, overconfidence, judgements, attractions, the sixth sense, risk attitude and herd like behaviour, herd like behaviour, investment on the basis of glamorous elements and faith of investors (Benjamin & Frank, 2011).

1.3.Research Problem

Many of the investors are guided by their personal sentiments for taking investment decision instead of some fundamental and technical analysis. Most of the times, these sentiments misguide investors and resultantly, they fail to take some proper decision in the market. Eventually, they had to suffer and market and economy also get disturbed because of wrong decisions taken by the investors. Hence, the problem statement is

“What is Impact of Investors’ Sentiments on Investment Decision in case of London Stock Exchange?”

1.4.Aim of Study

This study is mainly focused to evaluate the influence of investor sentiment in the decision making process and how these sentiments affect their stock returns.

1.5.Research Questions

The present study has formulated following important research questions that have been tried to be answered through this study.

• How investors make investment decisions in capital market?
• What are different key investors’ sentiments that play a key role in determining investment decision?
• What is the effect of sentiments on investors’ stock returns?

1.6.Research Objectives          

The present is an attempt to achieve following research objectives?

• To find out the potential investor’ sentiments that are likely to govern the decision making process carried out by an investor.
• To evaluate the behaviour of investors during the investment process.
• To provide the reasons for the sentiment generation in a capital market.
• To evaluate that how an investor’s sentiments affect his/her decisions.
• To evaluate the effects of investors’ sentiments on their stock returns.

1.7.Significance of Study

The present study is an attempt to perform an analysis of investors’ sentiments in determining the investment decision of investors. This study provides an insight that how investor sentiments affect the investment decision making of investors. The study evaluates the behaviours of investors. The present study has performed the analysis that how stock returns of the investors are affected by their investment decisions. The study plays a guiding role for the investors and guides them that how they can control their sentiments during decision making process in order to increase their stock returns.

1.8.Scope of the Study

The study is being performed for the investors trading in London stock exchange. It is of great help to them in understanding the effects of their various sentiments on stock returns. This study covers the personal sentiments of the investors and the factors contributing to the formulation of certain sentiments have not been evaluated in the present study.

1.9.Outline of Research Methodology

This study is being performed on investors trading in London stock exchange. Hence, all the investors trading in LSE are the population of the present study. The sample will be chosen from these investors. The data collection took place through self-administered questionnaires. The data is quantitative in nature as the researcher is following a quantitative approach in the present study. This data has been analyzed through SPSS and mainly regression analysis has been performed to test the formulated hypotheses.

1.10.Delimitations of Study

The present study is performed on investors making investment in London Stock Exchange only. Moreover, the present study is only evaluating the impact of investor’s sentiments on the personal stock returns of investors and not on the overall market.

1.11.Structure of the Dissertation

This dissertation is comprised of six main chapters. Chapter 1 is the introduction chapter that provides information about the background of the study, the problem statement, research questions, objectives and significance of the study.

Chapter 2 deals with the literature review. This chapter discusses the various sentiments as studied by previous researchers. The effects of these sentiments on investment decisions of the investor have been elucidated in this chapter. This chapter lays the foundation of the theoretical framework being tested in the study.

Chapter 3 is about theoretical framework and hypotheses. The theoretical framework has been established after thorough literature review and hypotheses have been derived from this framework. These hypotheses have been tested in the study.

Chapter 4 explains the employed methodology in the present study. This chapter explains the population of the study and it has been discussed that how a sample has been chosen from this population. This chapter provides the details of the collection and analysis of the data. This chapter is important in determining the validity and reliability of the study.

Chapter 5 is comprised of two sections. The first section provides the results of various statistical tools applied to the collected data. The results have been interpreted and hypotheses rejection or acceptance has been made on the basis of the obtained results. The second section is the discussion section. The results obtained in the first section have been explained in a non-technical way and they have been related to the previous studies.

Chapter 6 is the last chapter of the study. This chapter provides the conclusion based on the findings of the study. This chapter also provides the implications of the study. The implications for the academia and investors both have been provided in this section. At the end of this chapter, the researcher has explained some of the important limitations and some recommendations have also been made for future researchers.

2.Literature Review

2.1.Prologue

This chapter deals with the literature review. The previous studies investigating the investor’s sentiments and their impact on stock returns have been studied and the key findings of the previous studies have been reported here. The conflict ideas have been discussed in order to build an argument. The literature also incorporates a good blend of old and recent studies to have a broader understanding.

2.2.Irrational Investors and Investor Sentiments

The researchers have recently extensively targeted the behaviour of the investors. The non-rational investors misperceive the distribution of values of the asset in the financial market. The researchers have an implicit assumption it is very relevant to study non-rational investor for the critical evaluation of performance of financial markets. However, anciently there are two opposing point of views about the relevancy of this issue. On one hand researchers like Black (1986) advocate if all the investors show a rational behaviour in the market and have correct understanding of the information generated in the market, there will be a limited trading activity in the market as it will be in the interest of the investor to stop trading among each other. Moreover, when there will be a limited trading activity in the market then there will be a poor liquidity of individual assets and pricing of index funds and derivative assets will become very difficult.   The entire functioning of the market will get disturbed because of the poor liquidity of the individual assets. Black (1986) calls the irrational traders as noise traders. These noise traders misperceive the information generated in the market and liquidity of different individual assets stems from these noise traders. Resultantly, the traders with the proper market information have the incentive to execute the trading activity and the information about their trading is vested in the prices of the securities. In short, the structure of the entire financial market is largely dependent on the presence of these noise traders in the market. Alternatively, Firedman (1953) argues that irrational investors are not relevant to the performance of the financial market. He advocates that these irrational investors will be driven out of the market by the rational investors (Friedman, 1953).

According to the modern financial theory, investors tend to show a rational behaviour in identification and processing of the relevant information for optimal decision. However, recently, there are lot of empirical evidences that show the presence of investors’ behaviour deviating from the predictions made by the financial analysts (Charness & Gneezy, 2003).  The results are quite anomalous when the efficient markets hypothesis is followed. The Efficient Market Hypothesis (EMH) was quite dominant in the earlier studies of financial asset pricing. The differences in the results from the EMH are different because of the implicit cognitive biases. These biases are likely to distort the perception of the market and resultantly market prices of the securities are likely to significantly deviate from the fundamental values.  

Earlier studies of investments are based on the notion of rational investors and efficient markets. However, a large numbers of researchers have a consensus that investors are often irrational and markets are inefficient. This irrational behaviour of investors and market inefficiency causes over reactions by the investors creating significant earning possibilities. These possibilities can be availed through application of simple strategies (Dahlquist et al., 2000). The irrational behaviour of investors is because of the sentiments of the investors that have a significant influence investment decisions (Trabelsi, 2010). The concept of investor sentiments comes under umbrella of behavioural finance. Behavioural finance deals with the psychology of the investors and explains the behaviour of practitioners in the financial market. It also explains the effects of the behaviour of individual stock returns and on overall market and economy as well. Behavioural finance explains a number of hidden truth and many of the answers of the questions lies within the domain of behavioural finance. The behavioural finance explains the possible reactions of the individuals in uncertain market environment. The information analysis becomes harder in an uncertain environment and this situation give rise to the perception among various market participants that others have better knowledge about the market (Fernandez et al., 2011). Thus, investor sentiment provides the reasons behind the acceptance of overpriced shares. These sentiments are the behavioural elements embedded in the market prices (Benjamin & Frank, 2011).

The investor sentiments are referred to the demands put forward by the investor for the various securities being traded in the market that is not justified by the fundamentals principals of investment, research and analysis and real investment at firm level. The notion of investor sentiments stems from the work of Keynes (1936). The researchers like Black (1986), DeLong, et al. (1990) and Baker & Wurgler (2007) worked further on investor sentiments. Most of the studies define investor sentiments in a similar way. According to Shleifer & Summer (1990), “investor sentiments can be referred to changes in demand for the securities seem to be a response to changes in expectation or sentiment that are not fully justified by information.” It is also defined as “…a belief about future cash flows and an investment risk that is not justified by the facts at hand” (Baker & Wurgler, 2007).

There are several cognitive biases of the investors. One of the most important biases of the investor is overconfidence. The investors have a tendency to make their decisions unwittingly. These investors assign excessive weights to their knowledge and information available to them by ignoring the information available publicly (Lichtenstein & Fischhoff, 1977). Overconfidence is a type of irrational behaviour of the investors because this behaviour is not on the basis of principle of normative rationality. These principles are expected to be followed for the maximization of the utility (Trinugroho & Sembel, 2011).

There are various studies that have evaluated the impact of overconfidence in the financial markets. Overconfidence behaviour of the investors causes prediction errors. These prediction errors create adverse trading. The investors with overconfidence buy very expensive stock or they sell very cheap stock. Kufepaksi (2007) call this overconfidence as self-deception behaviour. This behaviour causes a remarkable error in predicting the stock prices. The resulting effects of this behaviour include excessive trading and investors show a high tendency to trade in the market (Graham et al., 2006). This overtrading in the stock market is because of overconfidence of the investors. These investors have the belief that they have the requisite ability and necessary knowledge for trading in the market. The investors having this belief have the tendency to make very frequent transactions. The trading frequency is largely affected by the overconfidence of the investors (Grinblatt & Keloharju, 2009).

There are many other studies showing that overconfidence of the investors not only affect trading frequency but also volume of the trading. Overconfident investors have a greater tendency to trade in large volumes (Glaser & Weber, 2003). The level of overconfidence has a positive relation with trading volume. The over trading stems from overconfidence and concomitantly there is a decline in the investors’ returns (Statman et al., 2003). Biais et al. (2002) state that the overconfident investors invest in the securities that are not likely to generate greater benefits that result in unprofitable investment.  The investors, who trade too much, experience reduction in earning and often they invest in stock with negative earnings (Kirchler & Maciejovsky, 2002).

Pompian (2006) state that the investors with overconfidence underestimate the risk and many a time they ignore the risk vested in a security. The most important risk associated with trading is reduction in stock price and investors lose their capital. The information about the global market and macroeconomics is used for the valuation of prices of the stock. The presence of a bad news in the market causes a decline in the stock prices as the investors will sell more and purchase less because of the bad news. This situation will increase the supply in the market and demand for the stocks will decline. However, the investor with overconfidence will ignore this risk emanated from the market information because of their own beliefs about the choices of stocks. Therefore, this type of information will not decrease the volume and frequency of trading activity (Trinugroho & Sembel, 2011).

According to Cheng (2007), overconfidence is quite common in human behaviours. The investors with this behaviour overestimate their ability to make the investments in the markets and they predict greater chances for the success. They estimate a higher probability of gaining return in the market. A person’s overconfidence level is identifiable with the help of calibration test. This test is a procedure that evaluates the level of knowledge and confidence of the investor. This combination shapes the level of overconfidence of an investor. The level of overconfidence of an investor is measured through the overconfidence score. This score is based on the probability of confidence level of minus the average score of the true answer (Kufepaksi, 2007).

Glaser & Weber (2003) defines overconfidence as the behaviour of an investor in which they overestimate the values of the assets. Overconfidence has three main aspects. These aspects are (1) Miscalibration that is referred to subjective probability which is greater than actual probability (2) Better-than-average effect that shows the tendency of the investor to estimating above average ability (3) Illusion-of-control that gives a belief to the individuals of having more ability to correctly predict the stock prices more accurately as compared to others.

The investors with overconfidence make many mistakes in the market that have been highlighted by Pompian (2006). These mistakes are as follows:

1. The investors with overconfidence make excessive trading because of the belief that they have a greater ability and knowledge of trading and other investor do not have such knowledge and ability.
2. The investors with overconfidence overestimate the market prices.
3. Overconfident investors do not assess the vested risk in an appropriate manner and it is underestimated.
4. The overconfident investors are unable to properly diversify their portfolio and their portfolios are under-diversified.

The theory of excessive trading advocates that investors with overconfidence will follow very aggressive strategies of trading. This situation will lead to poor investment performance. The overestimation regarding the information accuracy will increase the trading volume in the market. The increase in trading frequency and volume increase the market volatility that will cause lower and sometimes even negative returns (Gervais & Odean, 2001). The average behaviour of overconfident investors in the markets gives rise to harmful effects. However, some times this behaviour generates excessive returns as compared to rational investors. The investors with a higher trading desire will tend to be more aggressive in their trading strategies (Statman et al., 2003).

Stocks are important instruments in the capital market used for the investment. There are numbers of aspects of stocks that must be observed. One of the important aspects of stock is the difference between value stocks and glamour stocks. The literature widely recognizes the superiority of the value stocks over the glamour stocks. The value stocks have a lower market value as compared to book value. However, the glamour stocks have a higher value than book value. The difference between the price of a value stock and glamour stock is called value premium. This phenomenon is quite common in stock markets across the globe (Athanassakos, 2006).

“The stocks are called glamour stocks when they attract a large number of investors because of the significant price increase during a sustained period of time” (Hasnawati, 2010). If an organization is reporting a higher sale of a particular product as compared to expectations, investor will tend to behaviour positively to this reported information. The prices of the stock of the company will go higher and information reported by the firm will be reflected in the stock prices. Moreover, the investors will also underestimate the worth of the stocks that could not perform during a short run. The investors with this attitude have a higher tendency of making systematic errors and predictions about the growth of the company may prove faulty (John et al., 2002).

A study was conducted by Fama & French in 1998 on the investment strategies on the investors trading in 13 stock exchanges of the world. They concluded that value stock generate higher returns as compared to glamour stocks. This situation was prevalent in 12 stock exchanges out of 13 stock exchanges of the world. The investors follow the strategy of glamour stocks by following the book value approach are not like to gain higher returns and the value premium rarely exists in the actual situation. This situation is prevails significantly despite the stock with smaller capitalization yield higher returns as compared to stocks with larger capitalization (Saleh, 2005).

The findings of the Fama & French are also supported by other studies. Sukarsono (2008) performed a study on the investment in value and glamour stocks at the Indonesian Stock Exchange. This study determined the value and glamour stock by following the price to book value approach. He studied 100 stocks in totality. This study also confirmed that value stocks are likely to generate higher returns in the long run as compared to glamour stocks in the long run. The glamour stocks may help the investors to accumulate more wealth in the short run but it is very risky decision to invest in these stocks. However, this study also finds out that a large number of investors are very much obsessed by the glamour stocks and they have a higher tendency to invest their capital in these stocks. Another important finding of this study is related to the size of the company. The superiority of value stocks is visible in case of large companies but value stocks do not occupy a superior position in case of smaller companies.

The investors who are largely inclined towards investing in glamour stocks are likely to make more errors in forecasting. These errors may have devastating effects on the investments. The investor target the glamorous stocks in quest of earning more returns but these glamorous stocks show more volatile behaviour in the market. This volatility may have devastating effects on the entire investment of the capital and under adverse circumstances they can even lose all of their invested capital. The investors who are obsessed with glamorous stocks forego the risk associated with these stocks and they only focus on the returns being generated by these stocks. This is extremely risky attitude of the investor and cannot be treated as a rational decision (Auxier, 2006).

The investor in the stocks markets of developed economies tend to surrender a heuristic simplification in their decision making process. There are various cognitive errors that are quite visible in the decision making. The investor run the risk of making these errors in quest of avoiding time taking analytical exercise and gaining higher returns in a short time. The glamour stocks are the best options for these investors as they feel that these stocks will increase their wealth in days. The heuristic simplification is even stronger in the emerging markets as the investors trading in these markets are not familiar with the mechanism of the market and risk evaluation techniques. The investor overestimates the value of the glamour stocks (Chen et al., 2004).

Religious beliefs are important part of investors’ sentiments that affect the investment decision of an investor. There are concepts of faith based stock and sin stocks (Theodore, 2010). The faith based stocks are influenced by the sincerity and truthfulness. These stocks are in compliance with the faith in God and principles of social and religious norms. The investors following religious and social beliefs become very choosy while making the investment decisions. The foremost concern of these investors is compliance with religious and social norms. The investors who are overwhelmed by these religious beliefs are even ready to follow their principles on the cost of higher returns (Emil et al., 2006). The sin stocks often show a superior risk return trade off but it is not important for the investors with religious beliefs (Liston & Soydemir, 2010). On the contrary, some other studies negate this notion. These studies argue that faith-based funds do not have negative effects on the performance of a portfolio when they are taken as a group because of the adjustment of risk.  Rather these stocks are strongly correlated with portfolio of the market (Emil et al., 2006).

Religious beliefs of an investor restrict the investment options. It is very important to perform research on faith-based and sin stocks. The investors with religious beliefs do not invest in sin stocks regardless of their returns and market performance over a period of term. Although, there are many stocks that may be regarded as sin stocks by the investors and they have shown remarkable performance but the investors with religious beliefs are not interested in these stocks. They tend to stay away from these stocks. The demand of faith based stocks has experienced a growth in recent few years and many sin stocks have outperformed in the market (Liston & Soydemir, 2010). Some of the studies have investigated the religious sentiments of the investors but there are numbers of questions that are required by answered about the religious beliefs and investors’ returns. The previous literature lacks a consistent finding about this relationship. It is still unknown that an investor following the social and religious norms can generate higher risk adjusted returns on not. Same is the case with the investor who is neglecting these social and religious norms. Therefore, there is a dire need to investigate that how these religious beliefs affect the overall returns of the investors in the market.

The popularity of faith-based stocks is rising but the empirical evidence of the performance of these stocks is inconclusive. Some o the studies have found that these stocks show a lower performance as compared to the conventional financial products being traded in the market. According to the study of Hussein & Omran (2005), faith-based stock yield lower returns as compared to their other counterparts being traded in the market. Similar findings are also reported by Girard and Hassan (2005). However, some studies oppose such findings and they do not observe that faith-based stock under perform in the market as compared to their conventional counterparts (Naber, 2001; Hakim & Rashidian, 2004; Boasson et al., 2006).

The evidence regarding sin stocks is also inconclusive like faith-based stocks. According to Goodall (1994) sin stocks are more vulnerable to market volatility. They show a volatile behaviour in the long run. The study of Chen & Bin (2001) finds that sin stocks underperform as compared to other stocks in the market. They performed their studies on gaming stocks and further found that returns associated with these stocks are also affected by the gaming legislations. The study of Salaber (2007) reports very interesting findings. This study reports that sin stocks show a higher performance in a situation of recession as compared to the situation of expansion.

Many a time investors show their willingness to bear the financial cost in order to make a compliance with the social and religious norms. The superior returns of sin stocks are irrelevant for these investors (Kim & Venkatachalam, 2008). Lobe & Roithmeier (2008) performed study on faith-based and sin stocks. They constructed an index of approximately 700 companies and found that the performance of sin stocks is higher as compared to the stocks having compliance with social and religious norms. The study of Fabozzi et al. (2008) also reports similar findings. They stated that it is a common benchmark that sin stocks will outperform in the market. They argue that infringement of social norms cause generation of higher returns. The study of Hong and Kacperczyk (2009) finds that social norms have significant effects on performance of stocks. However, these effects are varying from time to time and from market to market.

The world economy has experienced many corporate scandals during the last few decades. Because of these scandals the investors are showing greater interest in ethical, trustworthy and socially responsible investments (SRI). The growth of SRI securities have been observed during the last few years. This growth is observable both in absolute and relative terms. The investors who are inclined towards faith-based and SRI investments funds make the selection of various religious, social, and ethical criteria. The investors chose specific stocks for the investments on the basis of these criteria (Boasson et al., 2006). For instance, an investor following the religious and social norms may choose the companies who are promoting society-friendly environment, create equal opportunities and avoid the stocks of companies dealing in wine, tobacco and gaming etc.

The herding behaviour in finance is referred to collective actions of investors in the market. The investors imitate each other and their decisions are based on the actions of other investors. For instance, a group of investor may trade in a similar direction at a same time. The investors following herd behaviour do not perform the assessment and analysis at their own and they follow the trend of the market. These investors show a form of correlated behaviour in the market (Avery & Zemsky, 1998; Sias, 2004).

There can be several reasons behind this herding behaviour. The participants of a market often infer the information from other participants of the market. The investors react in accordance with the fundamental information arriving in the market. Many of the analysts merely show the herd behaviour to safeguard their reputation in the market (Kim & Pantzalis, 2003). The institutional investors tend to show the herd behaviour for the remuneration purpose (Sias, 2004). Many a time investors are irrational and they exhibit the herd behaviour because of the social and psychological conventions (Holmes et al., 2013).

Pierdzioch & Rülke (2012) argue that herd behaviour sometimes results in efficient outcomes, but it is also likely to bring stabilization to market prices by creating bubble like episode in the market (Wylie, 2005). There is widespread assumption in the market that herd behaviour is quite common among individual as well as institutional investors. This behaviour is one of the prime reasons behind the stock market volatitliy and instability of prices (Rajan, 2006). Welch (2000) states, “Herding in financial markets, in particular, is often presumed to be pervasive, even though the extant empirical evidence is surprisingly sparse”. However, the empirical evidence about the herd behaviour is quite inconclusive in the existing literature.

There is an important question about the herding behaviour i.e. is it rational to exhibit herd behaviour? Under some specific circumstances the herd behaviour is quite a rational choice for the investors. For example, money managers simple copy the actions of other managers to protection their reputation and remuneration. Similarly, young analysts are of the view that they can be fired if they do not show their consensus with the senior analysts (Devenow & Welch, 1996). It is similar to a bank run situation when depositors make contribution in the bank after seeing the long queues of other depositors outside the bank e.g. observed in case of Northern Rock.

According to Bikhchanadani & Sharma (2000), there are two types of herdings that are quite observable in the market. The first one is called “spurious hearding”. This type of herding takes place when al the investors trading in the market face a similar kind of information and react in a similar way without knowing the actions of other investors. The other one is “intentional hearindg”. This herding takes place when the investors intentionally mimic the actions of other investors. The first type of herding may result in efficient outcomes for the investors whereas, the other one may not generate higher returns but this type of herding increases the fragility of the stock market. Intentional herding is one of the major factor contributing towards the volatility of the market and overall systemic risk is increased in the market.

The mangers often exhibit the herding behaviour in the market to share the blame. They tend to find justification of their underperformance from herding (Rajan, 2006). The herding is visible in forecasting, evaluation and investment simultaneously. The herding is even more common in the situations when the investors feel that the infroamtion available privately to them is inadequate for the decision making. Moreover, the herding behaviour may also prove a rational choice in case when the investors have a short term investment planning and they do not intend to go long for a longer period of time (Holmes et al., 2013).

Some of the authors are of the view that herding stems from the irrational behaviour of the investors and this behaviour give rise to bubble-like phenomenon. Moreover, non-rational herd behaviour also rises as a consequence of psychological restraints. The pressure from social circle plays an important role in this situation. The sociological factors have important implications for the investors. The market participants imitate each other. This imitation is more visible in the situation when market uncertainty is quite higher (Baddeley et al., 2004). The information scarcity is one of the fundamental reasons behind the herding behaviour.

Shleifer & Summers (1990) draw the line between arbitrageurs and noise traders. Arbitrageurs are fully rational. The term of noise traders was coined by Black (1986). These investors are not rational. The investments decisiones of noise traders are affected by the systematic biases. The changes in the demands of these investors are often irrational and they tend to to shown an irrational behaviour. Their decisions are not justified by the fundamental principles of investment. These investor often take the investment decision on the basis of advices given by the financial gurus or actions of the senior investors (Baker et al., 2009).

The economist have present various point of views about the investors’ sentiments determining the investment patterns. These sentiments often lead to mispricing of assets. The investors often overreact of underreact to the information coming to the market. This inforamtion is understood and interpreted differently by the investors. But in uncertain situation, when some of the investor fail to understand and interpret this information, they go along the flow of the market and imitate the actions of other investors or act upon the advice of the financial analysts. Many a time when this uncertaintly is even more higher, the investors do not make the their decisions on the basis of the information collected and analyzed privately but they base their decision on the advice and actions of other market participants. The motive behind this herding behaviour is to control the uncertainty. The slow dissemination of the inforamtion in the market leads to underreaction but it may cause overreation of the investors in the long run (Hong & Stein, 1999).

Henker et al. (2006) argue that herding is quite common in extreme market situations. The investors in this situation does not rely on their private information and analysis but they follow the trend of the overall market. The herding results in convergence of individual results in aggregate market return (Gleason et al., 2004). According to Sias (2004) institutions herd collectively and trading of these institutions takes place along with the momentum of the market. The herding is increase when the movement in the market are quite excessive.

The rational models of asset pricing and herding behaviour make remakrable predictions about the existence of cross-sectional standard deviation of returns. The market stress stipulate the following of herding behaviour specifically. The dispersion in the market will be wider when the investors will be following different types of information and analysis. All the securities being traded in the market do not have a same kind of sensitivity. The sensitivity of a security determines the dispersion in the market. The wide spread hearding behaviour, contrarily, will cause a lower dispersion in the market even in case of large market movements (Henker et al., 2006).

2.3.Investor Sentiments and Stock Returns

Investor sentiments create consistent mispricing when it is combined with the arbitrage risk (DeLong et al., 1990). Baker et al. (2009) provided empirical evidence that mispricing is a result of investor sentiments. There are four distinct way in which investor sentiments affects the real investment in the firm. Firstly, sometimes manager and investor have similar sentiments about the future prospects of the firm. In this situation, sentiments will result in increasing the investment (McLean & Zhao, 2009). Secondly, managers surmise the information about the prospects from share prices. Therefore, inflated prices of shares lead the managers to conjecture the higher cash flows in future and lower discount rate. Both factors will cause more investment in firm (Morck et al., 1990).  Thirdly, when the beliefs on investors are catered via investment, it results in higher firm value in the short run (Polk & Sapienza, 2009). Fourthly, many a time firms forego the investment in quest of external financing when the firm securities are undervalued. The investment and external financing will lead to an increase in sentiments in this situation (Baker et al., 2003).  

Investor sentiments are observable in a situation when the price of a security deviates from the present value of future cash flows. This deviation occurs because of two main reasons. Firstly, the investor make ex ante evaluation of the various events occurring in the market that are likely to affect the value of the security. This evaluation is often biased that leads to the wrong decision making by the investor s (Kaustia et al., 2008). Secondly, the investor show an irrational reaction the ex post resolution of arising uncertainties in the market because of various reasons (Hirshleifer, 2001).

Bernile & Lyandres (2011) have explained the different in the above two explained form of sentiments with a simple example. They have assumed a firm that is facing an event whose outcomes are quite uncertain. Assume that a firm faces an event with an uncertain outcome. For the purpose of simplicity they further assumed that there are two possibilities about the realizations of value. The first possibility is related to the firm value after the occurring of event that has some probabilities. When the investors have the first type of sentiments then they will tend to be overly optimistic about the outcomes of the event and they believe that the probability of the good outcome is greater than actual likelihood. In this situation, the value of firm before the occurrence of the event that is equal to the present value of firm after the event under the subjective probability distribution of the investor is higher than the expected value of the firm under the true probability distribution. Therefore, the change that is expected in the firm value after the event is negative. Under the second possibility, the investor may assign correct probabilities to the outcomes associated with the event but in order to resolve the embedded uncertainty they react in an emotional way. In this situation their valuation of the firm after the event is different for the true valuation of firm after the event. However, this difference between two valuations is not reflected in the pre-event value of the firm.

The two scenarios described above explain the role of investor sentiments in the market. The first scenario is referred to “immediate emotions” (Loewenstein, 2000). The firms’ values after the events are efficient in this situation whereas pre-event values are not efficient. The second scenario is referred to “anticipated emotions”. The firms’ values before event are efficient but post even values are inefficient (Bernile & Lyandres, 2011). The biased expectations of the investors and their irrational decision have strong effects on the stock prices. It important to determine the efficiency of pre-event and post event prices of the firms’ stock as it will lead the mangers to align their decisions. For instance, the decisions of a manager about making the real investment for the long term depends upon the factor that if the prices after the event are efficient or not. This efficiency of the post event prices of the firm is reflective of payoff from the investment in the future. The inefficiency of the post event prices is reflective of decline in earnings because of the investment in the short run (Edmans, 2009). The mangers exert costly efforts if they feel the market prices have the ability to incorporate the shirking effects. On the contrary, there are many researchers who have highlighted the importance of pre-event efficiency of the prices (Chirinko & Schaller, 2001; Gilchrist et al., 2005; Polk & Sapienza, 2009).

The approach of the behavioural finance was developed on the basis of anomalies with respect to efficient market hypothesis (EMH) that are observable in the capital markets. The behavioural finance deals with the psychology of investors in the finance. The behaviour finance is divided into two distinct categories. One is focused on the macro issues that deals with anomalies described in EMH. The other categories of behavioural finance deals with the micro elements including the psychological biases of the individual investors. The biases of the investors are in opposition to the rational behaviour of the investors as proposed by the classical economic theory, EMH and portfolio theory (Pompian, 2006).

2.4.Summary of Literature Review

The literature review has been prepared after making a thorough review of the existing literature. A blend of old and new studies have been consulted for the preparation of literature review in order to study the evolution of the ideas and the most recent developments as well. The literature is shows that investor sentiments are largely prevalent in all the investment decisions undertaken by the researchers. These investment decisions have important repercussions for the stocks returns of the investors. The sentiments are often referred to irrational behaviour of the investors. These investor sentiments often prove to be misleading. However, it is pertinent to note that the results about the nature of the relationship between investor sentiments and stock returns are quite inconclusive. There are quite conflicts results in the existing literature. Some of the studies show that particular investment behaviours have positive impact on stock returns while others report negative relationship between both.

 

 

3.Theoretical Framework and Hypotheses

The framework has been shown in Figure 1. This framework has been established after the extensive literature review. There is consensus among the researchers in the previous literature that investor sentiments have significant impact on stock returns. However, the nature of this impact is a controversial debate and literature shows inconclusive arguments and findings of the previous studies. Because of the lack of consensus and inconclusive findings the present study has formulated non-directional hypotheses. The direction will be determined through a comprehensive analysis.

Investor sentiment is the main independent variable in this study that has been shown as a construct in the framework provided in Figure 1. There are four key sentiments of the investors that have been chosen in the present study. The dependent variable of the study is stock returns of the investors. All the four key investor sentiments are being used as independent variables in the present study. The Table 1 provides the description of all taken variables.

3.1.Hypotheses

H1: Over confidence of the investor has a significant impact on stock returns.

H2: Investment in glamorous stocks yields returns for the investors.

H3:  Religious and social beliefs have a significant impact on stock returns.

H4: The herd behaviour has a significant impact on stock returns.

Figure 1: Proposed Theoretical Framework

 

 

 

 

Table 1: Description of Variables

Variable	Definitions	Reference
Over Confidence	Overconfidence is self-deception behaviour that provides the understanding of an investor that he/she has better knowledge and information as compared to others in the market.	(Kufepaksi, 2007)
Glamour Stocks	The stocks are called glamour stocks when they attract a large number of investors because of the significant price increase during a sustained period of time	(Hasnawati, 2010)
Religious and Social Beliefs	Religious and social beliefs deals with faith-based and sin stocks. The investors make their decisions on the basis of their religious and social beliefs and returns associated with a particular stock are not important.	(Liston & Soydemir, 2010)
Herd Behaviour	The herding behaviour in finance is referred to a situation in which investors try to copy the actions of others in the market.	(Avery & Zemsky, 1998)

 

 

 

4.Research Methodology

4.1.Prologue

This chapter of the study deals with the research methodology that is used for the completion of research. Research methodology occupies a central position in any research as it determines the validity and generalizability of the study. The reliability of a study stems from a rigorous research methodology. A researcher must take care of the necessary parameters of research while devising the research methodology. The researcher has ensured that all the necessary requirements of the study are fulfilled and all parameters of the researcher are taken well care of. The researcher has provided a brief overview of the various methodologies and then explained the chosen method among the explained ones. This explanation has been provided in order to support the selected method. This explanation well justifies the method adopted in the present study.

4.2.Study Type

The present study is a causal and Correlational study. This study endeavours to evaluate the role of investors’ sentiments in stock returns earned by these investors. An investor considers a number of factors before making the investment decision. However, many a times an investor becomes very much obsessed with his own sentiments and take the decision under these sentiments. Therefore, these sentiments can have a significant impact on the returns generated by their investments. This study is evaluating this impact of investors’ sentiments on stock returns. Hence, it is a causal study because the study hypothesize that there is a cause and effect relationship between investors’ sentiments and stock returns.

4.3.Study Context

The study is being conducted in the context of London Stock Exchange (LSE). The study is focused upon the investors trading in London Stock Exchange. Their perceptions are being studied in this study. The study is taking in account the sentiments of the investors. The study is evaluating the level of sentiments of these investors and role of these sentiments in stock returns being earned by them. The study has collected the data in a natural environment and investors were not asked to perform any activity but they were only asked about the ongoing practices being followed by them.

4.4.Study Participants

The present study takes the investors trading in London Stock Exchange as elements of population. The study is focused on the personal sentiments of these investors that are affecting their investment decisions, resultantly affecting the stock returns. The investors’ decisions are affected by various factors. Many a times, investors perform various kinds of analysis before taking the decision of investment. The markets are quite uncertain these days and it is really hard to take the decision in face of this high level of uncertainty. Apart from the analysis performed by these investors, many a time investors rely on the analysis of other investors or merely follow the market trend. Investors also have certain level of sentiments about different stocks. Some investors become more obsessed by these sentiments rather than the analysis of market. These sentiments can be misleading as they are far away from the true analysis of the market. The investors can only tell about their investments that overwhelm them during taking the investment decision. Therefore, the study is focusing on these investors. Alternatively, the researcher could have focused on analysts and market experts for collection of data but they would not have been provided accurate information about the sentiments level of the investors. Moreover, the study could have used the proxies but the accurate measurement of sentiments was not possible in this case as well. Hence, the researcher has decided to focus on investors from LSE for data collection.

4.5.Study Sample

A target population must be identified and sample should be selected from this population at design stage (Cooper & Emory, 1995). The present study has selected 200 investors from London Stock Exchange. The sample greater this number would have been very difficult to handle because of the cost and time constraints and other issues. Moreover, according to Sekaran (2003), a sample size greater than 30 and less than 500 is appropriate for a study. Thomas (2000) said that a sample of 200 is good enough for performing a comprehensive analysis, particularly in case of a study conducting survey. The response rate in the present study was 79%. The final data set was comprised on 158 respondents.

4.5.1.Sampling Design

Gupta (1993) argued that merely sample size cannot be considered a reliable source of making the sample representative. The selection procedure is also important in making the sample reliable and true representative of the population. The selection criteria for selection and non-selection of the elements in the population must be lucid (Oliver, 2003).        However, a researcher may face some constraints while making the selection of the sample out of population. The present study is following purposive convenient sampling. The researcher is facing significant budget and time constraints. The selection of sample on probability sampling may involve significant time and cost. Therefore, keeping in view these constraints the researcher is following the sampling strategy based on convenient sampling. This is most appropriate sampling strategy when a researcher faces time and budget constraints (Cooper & Schindler, 2007).

4.6.Research Approach

The approach of a research is very important in determining the validity and generalizability of research. The researcher must choose carefully among the two widely used approaches in research i.e. qualitative and quantitative approach. Both approaches have some merits and demerits. These two approaches are being discussed briefly here.

Qualitative approach is widely used in studies of social sciences. The studies that are exploratory knowledge follow this approach. This approach is focused on performing the qualitative analysis. Different objects, events and things are explained in detailed in this philosophy. This is being argued to be very useful as it does not rely on a single method of data collection and analysis. In this way, detailed information is obtained through this approach. This approach is helpful in deep digging. The researchers following this approach are more likely to obtain more information about the matter under investigation. However, these researchers must keep in view that personal biasness of the researcher may not be possible to separate. This biasness may result in misleading results.

Quantitative approach is widely used in studies of economics and finance. However, the use of this approach in studies of management, marketing and other branches of social sciences has increased many folds. The basic feature of this approach is quantification of various events and objects. The variables being studied under this approach are quantified. This approach attempts to measure various phenomenons. This characteristic of quantitative approach makes this approach more reliable. The results obtained through this approach are not only reliable but not generalizable to a wider population. This research approach is also useful in controlling the biasness of researcher. The results may not get impaired by the biasness involved in these researches. However, the information content generated under this approach is limited. The researchers also argue that reliance on some specific instrument and methods may not prove to be beneficial for the study.

The researcher has decided to follow quantitative approach in this study. This approach is mainly selected for its ability to control the biasness of the researcher. Moreover, this approach generates reliable results for the study. The integration of both approaches is not possible in the present study. The integration of both methodologies entails a cost and time. The researcher has scarcity of funds and time available for the present study. Thus, researcher has decided to follow quantitative approach.

4.7.Research Philosophy

Philosophy of the research lays down the foundation of the study. The entire research is built around this philosophy. The philosophy guides the researchers to develop the most suitable methods for the completion of the research study. The philosophy deals with development of knowledge during this research. The nature of the developed model is also determined by the philosophy. Saunders et al. (2009) have provided a research onion in their book. This research onion explains four core philosophies. The research onion is placed as Figure 2.

Figure 2: Research Onion

 

A brief overview of the four research philosophies is being provided below:

1. Positivism: This philosophy is quite close to the point of view of natural scientists. The researchers who tend to follow this philosophy work on the socially observable phenomenons. The generalization of some law is usually end product of this philosophy. The researchers following this philosophy follow a very structured methodology. The element of flexibility is missing from this philosophy. The researcher following this approach develops the hypotheses that are tested and results are generalized.
2. Realism: This philosophy deals with the scientific inquiry of various phenomenons. This philosophy states that reality is usually judged on the basis of five human senses. The realities in the real life are quite different from the perceptions. This philosophy is opposite to idealism. The researcher following this philosophy must understand that perceptions are different from realities
3. Interpretivism: This philosophy is of the view that systems in the current financial and management systems are quite complex and a single method cannot be used to fully understand them. Therefore, a research must use different methods to fully interpret the mechanism or phenomenon being studied in a research. A researcher following this philosophy should comprehend the differences prevailing between human beings and other objects and events etc. This philosophy emphasize upon treating the human beings as social actors.
4. Pragmatism: This research philosophy states that some research questions are more appropriate to answer as compared to others. A researcher may revisit the research questions carefully. This philosophy is very appealing as it emphasize that a researcher must follow a research approach. The reliance on a single method may not generate useful results. This philosophy focuses on integration of two research approaches explained earlier. This integration results in generation of wider information that may enhance the understanding and knowledge of the researcher and reader about the underlying phenomenon.

The present study is following the philosophy of positivism. This philosophy is more useful in performing a reliable analysis of the matters under investigation. The researcher in the present study is following a highly structured methodology. This methodology has been carefully planned. The researcher has also developed hypotheses that are tested at the end of this study. These hypotheses will be tested on the basis of the results obtained from statistical analysis of the collected data. The researcher will generalize the findings of the present study on the basis of use of positivism philosophy.

4.8.Data for Study

Data occupies a core position in any research. The findings of the study are drawn on the basis of the data. A reliable study is actually a product of reliable data. The researcher has ensured that all the necessary parameters for collection of a requirement of data are met. A researcher may use data of different types and nature depending upon the purpose and type of study. Data can be categorized into two main types:

1. Primary Data: Primary data is also called the first hand data. The data does not have any prior existence. This data is collected and generated at the same time. The data is solely collected for specific studies. The data is not used in other studies and is purely in line with the purpose of the present study. Because of this feature of data, this data is referred to pure data. However, there can be some questions raised with respect to reliability of the data because of the involvement of human element in this data. The respondents may provide biased responses. This biasness can be controlled to some extend by ensuring the reliability and validity of the instrument used for the purpose of data collection.
2. Secondary Data: This data is available before the collection of the data. The data has prior existence. The data is generated ahead of its collection. The same data can be used for several studies. The data does not have the characteristics of exclusivity. This data is not prepared by keeping in view any research study, so the purpose of biasness with respect to research studies is not involved in this data. However, other biasness like windows dressing is quite common in this type of data.

The data can be divided into three main categories by nature:

1. Cross Sectional Data: This type of data is collected on a single time period. The different elements of the population provide this data. This data is not time bound. The missing time factor is the main feature of this type of data. This type of data is quite common in one shot studies conducting surveys.
2. Time Series Data: This data is quite common in studies of economics and finance. This data is collected about a certain element of the population over a specific period of time. This data is time bound data. The time factor is the main feature of this data.
3. Panel Data: Panel data is widely used in studies of finance. This data combines the features of cross sectional and time series data. This data is collected from different elements of the population (feature of cross sectional data) for a specific period of time (feature of time series data). This data is quite useful as it addresses the problems of shortage of data by increasing the number of observations.

The present study is a one shot study that will not be repeated. Moreover, the targeted population of the present study is comprised of investors. The researcher has conducted a survey to collect the data from these investors. This data is being produced for the first time and collected at the time of production. The data is being generated exclusively for the present study. Therefore, the data collected for the present study is primary data. Moreover, the data collected for the present study is being collected for a single time period; therefore, the data is cross sectional in nature.  

4.9.Data Collection

The data in the present study is being collected through self-administered and web based questionnaires. The respondents are often concerned about the data collected from them. They are concerned that their identity can be revealed after the collection of data and it may raise serious problems for them in the organization. The organization may penalize them from providing the information of organization to outsiders. Here the data is being collected from investors and they have been asked to provide the information about their sentiments that may influence their investment behaviour. Therefore, fear of penalization is not prevalent in this case for the investors who are independently investing by using their own wealth. However, despite this fact that researcher has ensured that the secrecy of the investors have been maintained. The researcher has tried to explain to the respondents that their confidentiality is being strictly maintained and no respondent is being identified in individual capacity. The data provided by them is purely used for the purpose of research only. The researcher has provided a detailed cover letter in beginning of research for this purpose. The apprehensions of the respondents have been addressed in this cover letter.

4.9.1.Instrument

The data has been collected through a questionnaire. This questionnaire is being referred as ‘instrument’ here as it is being used for measurement of variables under study. The instrument is comprised of 23 items apart from demographic variables. These 23 items are related to 5 variables (4 independent variables and 1 dependent variable). The researcher has developed the instrument on the basis of many of previous studies.

4.9.2.Measurement Scale

The selection of an appropriate measurement scale must be made carefully. The accuracy of the scores of the test applied to the data depends upon the measurement scale. The researcher in this study has used a five point likert scale. This scale was developed to seek the agreement of the respondents on the statements asked from then in this survey. The range of this questionnaire is from 1 to 5 where 1 stands for ‘Strongly Disagree’ and 5 is used for ‘Strongly Agree’. Apart from the questions related to the main variables of the present study, a section comprising of demographic variables was also made a part of the research study. The demographic information about the respondents was collected from perform comparisons between different demographic categories.

4.9.3.Validity Testing

The researcher has tested the validity of the developed instrument before floating the same for purpose of data collection. The researcher checked the instrument for content and construct validity. The instrument was discussed with different investors in the market for content validity. The instrument was discussed with academicians for the purpose of construct validity. The suggestions of academicians and practitioners were incorporate in the developed instrument.

4.10.Data Analysis

The collected data has been entered into SPSS 20. A series of tests have been performed for a comprehensive analysis. The main analysis performed in the present study is regression analysis that is applied on the collected data to evaluate the impact on investors’ sentiments on stock returns earned by the investors. However, many other tests have been performed before performing the regression analysis. The researcher has performed the demographic analysis first to observe the sample characteristics. Demographic analysis is important to understand the applicability of the study.

The present study is following survey technique for the collection of the data. The variables under consideration (investors’ sentiments) are not directly measureable and an instrument has been used for the measurement of investors’ sentiments. Therefore, it is important to authenticate the reliability of the instrument. The reliability of the instrument has been evaluated through measure of inter-item consistency i.e. Cronbacha. This reliability has been tested on two stages. Firstly, the reliability has been tested on pilot testing stage. This pilot testing has been conducted to avoid any discrepancies in the instrument at a later stage and reliability of the instrument has been checked at earlier stage to avoid the wastage of time.

After testing the reliability the researcher has performed the tests of measure of difference. There are two main tests performed here. One is t-test and other one is One Way ANOVA with extension of Post Hoc Tuckey Test. The independent sample t-test has been performed to evaluate the differences with respect to sentiments in male and female investors. The results of this test show that who is more obsessed with sentiments while trading in the market. One Way ANOVA (Analysis of Variance) has been performed to evaluate the differences with respects to sentiments in two demographic categories. One category is the age groups and other category is education group. The differences in sentiments have been examined in respondents with different age groups and different educational backgrounds. These highlighted differences are important to understand the level and nature of the investor sentiments that are operational during the investment decisions taken by these investors.

After applying the tests of measure of difference, the researcher has performed the main analysis to evaluate the impact of investors’ sentiments on stock returns. This is done through regression analysis. However, there are certain assumptions that should be checked before applying the regression results. These assumptions are important in assessing the reliability and generalizability of the results of regression analysis. There are following six assumptions that have been tested here in this study before applying regression analysis.

1. Normality of the Data: This assumption states that data must be normal. This assumption is tested through skewness and kurtosis in this study.
2. Linearity in Variables: According to this assumption, there must be a linear relationship between independent and dependent variables. This assumption has been tested here with correlation matrix.
3. Homogeneity of Variance: The variances in variables must be homogeneous. This assumption has been tested through Leven’s Statistics.
4. Absence of Outliers: There should be no outliers in the data, as per this assumption. The assumption has been tested through box plot.
5. Normal Distribution of Error Terms: The error terms computed during the regression analysis must have a normal distribution. The assumption has been tested with the help of histogram.
6. Absence of Multicolinearity: This assumption states that all the independent variables must be independent of each other otherwise individual impact of some variables may become difficult to evaluate in case of normality of the data. The assumption has been tested through VIF and Tolerance values.

After testing the assumptions of regression, the researchers have fairly reported all the results of these assumptions. Afterwards, regression analysis has been performed to evaluate the impact of investors’ sentiments on stock returns. The researchers has performed the regression analysis with enter method and stepwise regression. The regression with enter method has been performed to evaluate the overall impact of all the sentiments on stock returns and stepwise regression has been performed to identify the most significant sentiments and examine their impact on stock returns.

4.11.Limitations of the Study

The present study has certain limitations. The current study is focused on investors sentiments and stock return. Stock returns can be measured accurately with the help of secondary data. However, investor sentiments cannot be measured directly. The researchers can either use some proxies that may deploy secondary data or a questionnaire can be used for measurement of these sentiments. The researcher is using questionnaire in the present study to measure the sentiments and stock returns are also being measured with the help of instrument in order to maintain the uniformity of data. Therefore, the researcher has to rely on the statements provided by the investors who are respondents of the present study.

The present study is also has the limitations related to sample of the study. The study is only focused on LSE so the study may not be generalizable to investors trading in other stock exchanges across the globe. Moreover, the sample has been chosen on the basis of convenient sampling because of the cost and time constraints faced by the researchers.

The researcher is only focusing on quantitative approach in the present study. The focus on this approach only is likely to generate limited information. The researcher may generate a wider content of information on qualitative approach or integrating both approaches. The integration can be more useful as it will generate wider information at one end and on other end it will control the biasness of the researcher.

4.12.Ethical considerations

A good research study is strictly in compliance with the ethical standards of the research. A researcher is always supposed to follow ethical practices while performing a research. The researcher in present is also following ethical practices and compliance with ethical standards has been ensured by the researcher. The researcher has ensured that no respondent is identified in individual capacity. The confidentiality of the respondents has been maintained at all levels. Moreover, the respondents were not forced for the provision of data. The researcher did not use any coercive means for collection of data. The respondents were provided ample time to provide the data. This was helpful in obtaining unbiased data.

 

 

 

5.Results and Analysis

5.1.Prologue

This chapter of the study deals with the results that have been obtained after applying various statistical tests on the data collected during this study. Results are very important in any empirical study as they provide the findings of the study. The findings of the study become more reliable when they are based on the results of the widely recognized statistical tools. These findings extend the validity of the study. The generalizability of the study becomes wider when results findings are based on reliable results. It is responsibility of a researcher to fulfil all the basic requirements of the statistical tools before applying these tools.  The researcher in the present study has ensured that all the parameters of have been met before applying the results. The researcher has reported all the results in detail in this chapter. These results have been thoroughly interpreted. The findings of the study on the basis of these results have been highlighted at the end of this chapter.

5.2.Reliability Analysis

The variables taken in the present study are not directly measureable, except stock returns. The investor sentiments focused in the present study cannot be measured directly. The researcher has used an instrument (questionnaire) for the measurement of these variables. Therefore, it is necessary to check the reliability of the instrument used for the collection of data in the present study. As reported earlier in chapter 4, the reliability has been tested twice in the present study. Firstly, the reliability has been tested during the pilot testing stage. Results of pilot testing stage have been reported in Table 2. This table shows that the values of Cronbach’s Alpha for all the variables are above 6. Thus, reliability of the instrument at pilot stage testing was proved and further data collection was performed after this.

Table 2: Reliability Analysis (Pilot Testing)

Variable	Cronbach’s Alpha	N
Overconfidence	.678	5
Glamour Stock	.614	4
Religious Beliefs	.732	5
Herd Like Behaviour	.692	5
Stock Returns	.617	4

 

Secondly, the reliability of the instrument has been tested after the completion of data collection process. This reliability has been tested to ensure that the instrument is still reliable after completing the process of data collection. The results of this reliability are reported here in Table 3. These results also show that values of Cronbach’s Alpha for all the variables are still above the acceptable benchmark of 0.6. Thus, reliability of the instrument at both stages has been confirmed by the results reported in Table 2 and Table 3.

Table 3: Reliability Analysis (Final)

Variable	Cronbach’s Alpha	N
Overconfidence	.784	5
Glamour Stock	.745	4
Religious Beliefs	.894	5
Herd Like Behaviour	.697	5
Stock Returns	.781	4

5.3.Descriptive Statistics

Descriptive statistics are very important in evaluating the overall attitude of the respondents. The results of descriptive analysis are reported in Table 4. The values of minimum and maximum are shown in this table. These values are showing the range of the values of the various variables. These values are showing here that dispersion in the values of the variable is not too high. It is very much under control here. The same thing has also been confirmed by the standard deviation. However, the largest dispersion is observable in herd like behaviour.

The mean value is measure of central tendency. The results provided here in Table 4 shows that investors do not show their inclination towards overconfidence, glamour stock and religious beliefs. The investors seem quite mature and they understand that overconfidence can be slayer for their investment activities. They also have a very good understanding that it can be quite risky to invest in glamour stock. Moreover, most of the investors are of the view that religion must be kept separate from investment activities. However, herd like behaviour has been found quite common in the market. There are many investors who are following other investors in the market in order to decide their investment pattern. The investors in the market are also getting good returns. The returns are not too high but the value of 3.71 shows a satisfactory position of returns earned by the investors.

 

Table 4: Descriptive Statistics

	N	Minimum	Maximum	Mean	Std. Deviation
Overconfidence	158	2	4	2.64	.540
Glamour Stock	158	2	4	2.67	.507
Religious Beliefs	158	2	5	2.16	.604
Herd Like Behaviour	158	2	5	4.12	.726
Stock Returns	158	3	5	3.71	.460

 

5.4.Independent Sample T-Test

Independent sample t-test has been performed to evaluate the differences between the sentiments of male and female investors taken in the sample of the present study. The results have been reported in Table 5 and Table 6. Table 5 shows the results of independent sample t-test and Table 6 show the results of group statistics. This tables first reports the results of Levene’s test. Levene’s test the primary assumption of independent sample t-test i.e. homogeneity of variance.

The value of F-Statistics for overconfidence, glamour stock, religious beliefs, herd like behaviour and stock returns are .002 (p > 0.05), 1.037 (p > 0.05), .825 (p > 0.05), 2.060 (p > 0.05) and 1.232 (p > 0.05) respectively. These values authenticate the homogeneity of variance for all the variables. Therefore, independent sample t-test can be processed here.

The value of t-statistics for overconfidence is -1.152 (p > 0.05). This value shows that null hypothesis is accepted here i.e. there are no differences among male and female. There are no significant differences proved among the perception of male and female investors with respect of overconfidence. Although, table 6 shows that female investor are more overconfident but the mean value of overconfidence for male customers are quite close to each other and mean difference is quite nominal. Male and female investors are having an almost equal level of overconfidence about making investment in the market.

The value of t-statistics for security risk is 2.439 (p < 0.05). This value shows that null hypothesis is rejected here i.e. there are no differences among male and female. There are significant differences proved in inclination of male and female investors towards glamorous stocks. Table 6 shows mean value of glamour stock for male is 2.53 and for female this value is 2.88. By looking at these two values, it quite clear that both male and female are not much attracted towards glamour stock but female investors still have a higher inclination towards glamour stocks as compared to male investors.

Table 5: Independent Sample T-Test 

		Levene's Test for Equality of Variances		t-test for Equality of Means
		F	Sig.	t	df	Sig. (2-tailed)	Mean Difference	Std. Error Difference	95% Confidence Interval of the Difference
									Lower	Upper
Overconfidence	Equal variances assumed	.002	.967	-1.152	156	.251	-.111	.096	-.302	.079
	Equal variances not assumed			-1.090	68.134	.280	-.111	.102	-.314	.092
Glamour Stock	Equal variances assumed	1.037	.155	2.439	156	.016	-.357	.089	.041	.394
	Equal variances not assumed			2.497	79.026	.015	-.357	.087	.044	.391
Religious Beliefs	Equal variances assumed	.825	.365	-2.279	156	.024	-.243	.106	-.453	-.032
	Equal variances not assumed			-2.497	91.583	.014	-.243	.097	-.436	-.050
Herd Like Behaviour	Equal variances assumed	2.060	.082	-1.213	156	.003	-.364	.130	-.413	.099
	Equal variances not assumed			-1.259	81.325	.004	-.364	.125	-.406	.091
Stock Returns	Equal variances assumed	1.232	.314	-3.774	156	.000	.298	.079	-.454	-.142
	Equal variances not assumed			-4.198	94.858	.000	.298	.071	-.439	-.157