Determinants of Investment Behavior. Empirical Analysis of Individual Investors in Pakistan Stock Exchange

Abstract

This study investigates the perceived decision usefulness of financial and non-financial information in guiding the individual investor’s investment-decision behavior. The objective of this examination is to determine how financial information and non-financial information is being materialized by an individual investor and to what extent it affects their risk tolerance and investment decision behavior. This study also incorporates the role of confirmation bias to determine how it shapes the investor’s investment decision. The contextual setting of the study is provided by individual investors involved in stock trading at Pakistan Stock Exchange (PSX). The approach of the study is deductive, while a quantitative strategy is adopted by using a survey questionnaire for data collection. Primary data was collected from individual investors actively involved in stock trading at Pakistan Stock Exchange (PSX). Theoretical underpinning is based on the signaling theory. Structural Equation Modelling (SEM) has been carried out to statistically examine the strength of the measurement model. Findings of this study exhibit that on average, individual investors invest in firms with detailed financial and non-financial disclosures. The result also confirms the mediating and moderating role of risk tolerance and confirmation bias. Financial and non-financial information remain potential determinants of individual investor risk tolerance, which in turn determine the individual investor investment decision. Categorically, the finding indicates that improved financial and non-financial disclosure practices are required to help investors in making sound stock investment decisions. The study has several potential implications for individual investors and other stakeholders, particularly companies listed on Pakistan Stock Exchange and regulators. The implications of this study remain pragmatic for individual investors, investment managers, brokers, and consultants because it offers insight to understand the information environment and its role in mitigating uncertainty. Moreover, the study also signifies the robustness of non-financial information and biases to shape investor’s investment decisions. Beside practical implications, the study also validates the signaling theory in the context of Pakistan. The empirical model is novel to insight the individual investor investment behavior in the context of Pakistan. This study will extend the current body of knowledge in the context of stock investment decisions by providing insights into the practices carried out by policymakers, brokers, and regulators of the stock market in Pakistan. Moreover, the findings are also robust to understand the role of behavioral biases and how they hinder investors from making sound investment decision.