Literature Review concerned with Individuals’ Investing Behavior

2.1 INTRODUCTION

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

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

2.2 STOCK MARKET IN GULF REGION

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

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

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

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

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

Market

Foreign Investment Ceiling

Bahrain

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

foreign ownership; 100% in general for GCC nationals

Kuwait

49% in general

Oman

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

Qatar

25% in general

Saudi Arabia

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

Saudi banks

United Arab

Emirates

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

with company’s approval

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

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

Table 2.2: Main Stock Market Indicators in the GCC Countries

Market

Number of listed companies

2007

2008

%²

Bahrain

51

51

–

Kuwait

196

204

4.1%

Oman

125

122

-2.4%

Qatar

40

43

7.5%

Saudi Arabia

111

126

13.5%

United Arab Emirates

120

130

9.2%

Total

643

676

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

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

2.3 ACCOUNTING INFORMATION

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

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

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

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

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

2.4 ECONOMIC CONDITION FACTORS

Previous literatures suggested that economic conditions affect investing decision of investors. For example, Merikas et al., (2003) have modified survey to analyze factors inf