Investors Sentiment in India Survey

8/2/2019 Investors Sentiment in India Survey

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Investor sentIment In IndIa: a survey

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In this paper we examine denitional aspect of Investor Sentiment, the key economic, market and regulatory

factors that inuence investor sentiment and the relationship between investor sentiment and market

performance. There seems to be no clear consensus on the concept of investor sentiment and hence any

meaningful denition ought to be inclusive and uid. The important economic factors highlighted in the work

are: Real GDP, Corporate Prots, Rate of Ination, Level of Interest Rate, and Liquidity in the Economy. The

market based factors that can be linked to Investor Sentiment are: Put Call Ratio, Advance Decline Ratio,

Earning Surprises, P/E Ratio, and Price to Book Value. The regulatory framework of a nancial market does

seem to have a strong bearing on investor sentiment especially the legal provisions relating to corporategovernance and Grievance Redressal Mechanism. Most respondents believe that investors sentiment and

market returns are bilaterally co-related. Our ndings are largely in conformity with recent studies for other

capital markets. These ndings can be used to develop a comprehensive Investor Sentiment Index for India

and hence have signicant implications for investors, market intermediaries and nancial regulators.

K w : Investor Sentiment, Market Sentiment, Market Performance, Asset Pricing, Risk Appetite

IntroduCtIon

Sentiment prevailing in the capital markets is a

critical driver of the economy as it inuences the

business cycle and nancial uctuations in an

economy. Investor Sentiment translates into investor

condence or lack of it and acts as a proxy for collective

investor behaviour and affects the stock market. There is a

growing body of both theoretical and empirical literature

that examines the role of investor sentiment and its

implications for nancial markets and institutions. This

literature has improved our understanding of some

nancial anomalies documented in prior work, such as the

predictability in stock returns, excessive trading volatilityand evidence on investors under or over reaction to

corporate announcements. As a result, contemporary

research explores the drivers of their behaviour, trading

patterns and implications for market efciency. However,

most evidence remains controversial, at best, and the

debate about sources of investor sentiment and the

importance of sentiments impact on asset prices is still

continuing (Ronald Domingues, 2008).

As the volume of studies that use investorsentiment to understand shifts in asset prices grows,

so does the variety of investor sentiment measures.

Dennis and Mayhew (2002) used the Put-Call Ratio,

Randall, Suk and Tully (2003) used Net Cash Flows

into Mutual Funds, Lashgari (2000) used the Barrons

Confidence Index, Baker and Wurgler (2006) used the

Issuance Percentage, Whaley (2000) used the Market

Volatility Index(VIX) popularly called as InvestorFear Gauge, and Kumar and Persaud (Is the Name

correct?) (2002) employed the Risk Appetite Index

(RAI). Traditional research on asset pricing has focused

on firm-specific and economy-wide factors that affectasset prices. Recently, the finance literature has turned

to non-economic factors such as investor sentiment as

possible determinants of asset prices. Some researchers

(Eichengreen and Mody, 1998) suggest that a change in

one set of asset prices may change investor sentiment,

thus triggering changes in a seemingly unrelated set

of asset prices, especially in the short run, giving rise

to pure contagion.


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VISIONThe Journal of Business Perspective l Vol. 13 l No. 2 l AprilJune 2009

14 l Sehgal, SoodandRajput

Fisher and Statman (2000)and Baker and Wurgler

(2006) have also recognised that investor sentiment

may be an important component of the market pricing

process. In fact, some studies (Baek, Bandopadhyaya

and Du (2005) suggest that shifts in investor sentiment

may explain short-term movements in asset prices better

than any other set of fundamental factors. The presentwork involving investor survey in India is motivated by

controversial and inadequate research on the subject. This

is even more pertinent in the light of the fact, that emerging

markets such as India are expected to be impacted more

by investor sentiment and hence exhibit higher volatility

compared to matured markets. In this paper, we attempt

to trace the important economic, market and regulatory

factors affecting investor sentiment in India.

revIeW oF LIterature

The subject of investors protection has attracted theattention of a number of researchers internationally

as well as in India. In what follows a brief review of

literature in the subject is carried. The studies reviewed

are divided into those carried in the developed markets

such as the US and the UK and those carried in emerging

markets like India. William Mahoney (1992) provides

a comprehensive review of the relationship between

shareholders and the board of directors and describes the

powers and inuence that various types of shareholders

can exert on the boards. Porteba and Samwich (1995)and

Morci, Shleifer and Vishny (1990) conclude that people use

stock market as an indicator of future labor income. Thistheory postulates that growing stock market leads people

to believe that economy will ourish and cause a wealth

effect thereby increasing investor condence level which

will bring forth a shift in stock market wealth. Matsuaska

and Sbordone (1995) nd that investor condence does

in fact have a positive correlation with Gross National

Product (GNP). The conclusion that investor condence

plays an important role in the business cycle gives them

a reason to believe that investor condence has a strong

relationship with the stock market as well.

Otoo (1999) nds the inuence of stock prices on

consumer condence and found positive effects, while

the opposite relationship was not true.Chopin and Darrat

(1999) concluded that the investor sentiment does contain

some strong predictive power for some macro-economic

variables. Poterba (2000) explains that there is a direct

implication of investor sentiment on international asset

pricing models of institutional and individual investors

in developed and emerging markets. Baker M. and

Wurgler J. (2003) examine how investor sentiment

affects the cross-section of stock returns. Theory predicts

that a broad wave of sentiment will disproportionately

affect stocks whose valuations are highly subjective

and are difcult to arbitrage. When sentiment is low,

subsequent returns are relatively high on smaller stocks,

high volatility stocks, unprotable stocks, non-dividend-

paying stocks, extreme-growth stocks, and distressedstocks. This is consistent with an initial under pricing of

these stocks. When sentiment is high, on the other hand,

these patterns attenuate or fully reverse. XU J., (2004)

explicitly addresses the performance of actively managed

mutual funds conditioned on investor sentiment. Almost

all fund size quintiles subsequently outperform the market

when sentiment is low, while all of them under perform

the market when sentiment is high. He further shows that

the impact of investor sentiment on fund performance is

mostly due to small investor sentiment. These ndings

were in line with the ndings of the study carried by

Gruber (1996).

The pattern of decreasing returns to scale in mutual funds

is fully reversed when sentiment is high as documented by

Chen, Hong, Huang, and Kubik (2003). The pattern persists

and is more pronounced when sentiment is low. Cliff and

Brown (2005) found that the link between asset valuation

and investor sentiment is the subject of considerable

debate. If excessive optimism drives prices above intrinsic

values, periods of high sentiment should be followed by

low returns, as market prices revert to fundamental values.

Using survey data on investor sentiment, they provide

evidence that sentiment affects asset valuation. Market

pricing errors implied by an independent valuation model

are positively related to sentiment. Future returns over

multiyear horizons are negatively related to sentiment.

Denys (2005), using sentiment betas, tested Hard-to-

Value, Difcult-to-Arbitrage (HV-DA) hypothesis. The

hypothesis postulated that investor sentiment affects

some stocks more than others due to the differences in

rm characteristics. It was found that stocks with a high

sentiment beta are smaller, more volatile, and have greater

short sale constraints with a lower dividend yields. Such

stocks do not earn higher average returns in the short-

run, but appear to require a premium over the long-run.According toBaker, Wurgler, (2006), and Baker, Wurgler

(2007), broad waves of investor sentiment should have

larger impact on securities that are more difcult to value

and to arbitrage.

Consistent with this intuition, we nd that when

an index of investor sentiment is low, the small, young,

high volatility, unprofitable, non-dividend-paying,

extreme growth, and distressed stocks earn relatively


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VISIONThe Journal of Business Perspective l Vol. 13 l No. 2 lAprilJune 2009

Investor Sentiment in India: A Survey l 15

being kept out of participation in public issues due to the

misplaced policies. His study revealed that over the last

four years only a very small percentage of the total capital

was offered to small investors in public issues.

Most of the studies in India found that majority of

shareowners were dissatised with the supply of abridged

balance sheets and information provided to investors at

the time of making new issues and therefore relied more

on media sources. Investors have little trust in companies

and therefore preferred to invest in government schemes

and other safer modes of investments. Psychological and

sociological factors dominated over economic factors

while investing in stock markets. Survey of literature

reveals that, the nature of relationship between Investor

Sentiment and stock market returns is debatable. Changes

in the stock market inuence consumption and investors

confidence and the sentiment in turn is expected to

inuence stock returns.

data and metHodoLoGy

A survey was conducted involving various stakeholders

in nancial sector like Investment bankers, brokers,

market regulators, equity analysts, corporate fund

managers etc. Convenience Sampling was adopted giving

adequate representation to different stakeholders. Out of

the total number of 160 circulated questionnaires only

112 responses could nally be elicited which were than

analysed on the basis of various attributes. The sample

respondents comprised of 34 brokers and sub-brokers,

10 equity analysts/wealth managers/portfolio managers,

14 corporate nance managers, 12 investment bankers,

24 mutual fund managers, 10 FII representatives, and 8

market regulators.

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Methodology used was structured questionnaire

drafted with critical inputs from ve subject experts.

Questionnaire validation was done by ve independent

subject and market experts to ensure appropriateness and

none overlapping of question structure. The questionnaire

had closed ended questions and gave relevant range ofoptions to the respondents (for questionnaire see Annexure

1). Responses were analysed using e-questionnaire and

those delivered physically using trained investigators. In

the questionnaire, ve attributes were tested for analysing

respectively the denitional aspects of investor sentiment,

economic and market factors that inuence sentiment,

relationship of regulatory framework and the relationship

between investor sentiment and stock returns.

higher subsequent returns. When sentiment is high,

the aforementioned categories of stocks earn relatively

lower subsequent returns. Johnsone, Lei, Lin, Sanger

(2006) related the information contained in the trend in

trading volume to investor sentiment, and investigated

its ability to predict stock returns. Using the change in

trading volume per unit of time as a measure of investorsentiment for individual stocks, they documented a

negative and signicant cross-sectional relation between

trading volume trend and future stock returns. This

relation is dynamic and holds after controlling for several

liquidity measures, return momentum and other possible

determinants of expected returns.

In Indian context, Gupta (1991) conducted first

comprehensive study on the prole, perceptions and

preferences of small investors followed by a series

of studies conducted by Securities and Exchange

Board of India (SEBI). Shankar Acharya Committee

(1998) concluded that most of the companies enjoy

little credibility with investors. The situation is not much

different today despite a corporate governance code

framed by SEBI. That is why investors generally go for

Government related securities and do not trust corporate

securities howsoever superior they might be. Singh and

Tripathi (2001) found that most of the mutual fund (MF)

investors were not satised with the performance of their

mutual fund schemes. This was particularly the case with

equity schemes and the investors of public sector mutual

funds in general. Investors were not aware of the risk

inherent in Mutual Fund investments and expected them

to generate risk free returns. They preferred National

Savings Certicates (NSCs), Public Provident Fund (PPF)

and MF schemes in the descending order of preference

with the least preferred nancial assets being debentures,

post ofce schemes and balance funds.

Mitra (2001) in its report on investor protection

emphasised the need for a specic Act to protect investors

interests. The committee wanted SEBI to be the only

regulatory authority with the wide ranging powers of

investigation and prosecution. Gupta L.C., Gupta C.P,

Jain Naveen (2001) criticised the move of depositories

to change fee structure from ad-valorem to at ratebasis. Such a move was considered anti-small investors

since it will increase the burden of DEMAT cost for small

investors while big investors and market operators will

stand to gain. Making dematerialisation compulsory

was also criticised by them since the same has not been

made compulsory even in the developed markets like

the US. Haldea (2003) argued that the small investors,

recognised as the backbone of the capital market, are


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considered most important and a weight of one to the factor

considered least important. The economic factors taken

into consideration included real GDP, employment levels,

corporate prots, rate of ination, level of interest rate,net foreign investment ows, liquidity in the economy

and so on. A factor getting less than 40 percent responses

were not considered for further analysis. See Table 2.

tbl 2: dil f rp ag sc

ecic Fc n. f

rp

ag

sc

Real GDP 82 8.17

EML Level 66 5.18

CRP Prot 68 7.12

Rate of Ination 100 6.6

Level of INT Rate 88 6.14

Net FII Flows 98 5.53

Liquidity in the Economy 90 6.53

Consumer Spending 84 5

Household Construction Activity 58 5

Oil Price Shocks 86 4

Exchange Rate Fluctuations 20 4

Fiscal Decit 34 4.35

Market Capitalisation 2 4

Ofcial Statement of Govt. 14 4

Other Factors

See Exhibit 2

Most important economic factors in order of

importance by average scores attained were, Real GDP

(number of responses 82, Average Score 8.17), Corporate

Prots (number of responses 68, Average Score 7.12),

survey FIndInGs

The survey mainly aimed at identifying the factors

that have a decisive bearing on investor sentiment as

also understanding the relationship between investor

sentiment and stock market performance. The sample

responses were analysed using Data Representation

Technique. This analysis will help in developing an

Investor Sentiment Index which will be a useful tool

in studying the relationship of market performance and

investor sentiment and its understanding is of crucial

importance in designing effective policy.

Denitional Aspect

In view of the divergent views on the very concept of the

term investor sentiment, it was considered appropriate

to ask different stakeholders, as to what is the most

appropriate way of dening investor sentiment. The

questionnaire offered six specic denitions shortlisted

after a thorough review of literature on the subject. Besides

the concerned respondents were also given the freedom to

dene the concept the way they deem t. An analysis of

the responses reveals that denition V1, understanding

of investor behaviour that influences stock market

activitywas found to be the most favored one with 30.34

percent of the respondents considering it to be the most

appropriate way of dening the investor sentiment. This

was followed by denition V, aquantitative measure to

gauge the levels of optimism or pessimism present in the

market with 19.64 percent of respondents opting for the

same. See Table 1.

Table 1: The Rating of Denitions

ranK deFInItIon ratInG (% )

I DEFINITION NO. I 10

II DEFINITION NO. II 13

III DEFINITION NO. III 9

IV DEFINITION NO. IV 18

V DEFINITION NO. V 20

VI DEFINITION NO. VI 30

See Exhibit:

ecic Fc

Having operationalised the denition, the survey further

studied the impact of various economic factors on investor

sentiment. The respondents were asked to rank various

economic factors in order of importance on a ten point

scale (from 1 to 10) giving a weight of 10 to the factor

Exhibit 1: Denitional Aspect of Investor Sentiment


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Rate of Ination (number of responses 100, Average

Score 6.6), Level of Interest Rate (number of responses

88, Average Score 6.6), and Liquidity in the Economy

(number of responses 90, Average Score 6.3).

mk Fc

The survey further identied the market factors that

inuence investor sentiment. The factors mainly included,

put call ratio, advance decline ratio, margin money

requirement, listing premium on IPOs, performance of

small cap stocks, cash position of mutual funds, closedend funds discount, new high and lows, opinion of

investment analysts, credit balance with brokers, earning

surprises, P/E ratio, price to book value, stock index

performance, momentum stock behaviour, yield on all

bonds and others. The respondents were asked to rank

various market factors in order of importance on a ten

point scale as was done in the case of economic factors.

The factors with responses of less than 40% were not

considered. See Table 3.

Of the remaining factors, most important were Put

Call Ratio, Advance Decline Ratio, Earning Surprises, P/E

Ratio, and Price to Book Value as shown in Exhibit 5.

rgl apc

The survey also made an attempt to establish whether

there exists any relationship between regulatory aspects

and investor sentiment. Besides asking the respondents

of their opinion, they were given choices to select as

exhibi 2: ecic Fc affcig I si

exhibi 3: m Ip ecic Fc


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to which of the regulatory aspects are more important

that may have any bearing on investor sentiment. About

11 percent of the Respondents said that regulatory

aspects did not inuence the investor sentiment. Of

the remaining 89 percent about 68 percent considered

regulations regarding corporate governance inuencing

the investor sentiment and only 32 percent opted forgrievance redressal mechanism as a regulatory aspect of

any bearing. See Table 4.

According to the survey, 11% of the respondents

said that regulatory aspect did not inuence investor

sentiments. See Exhibit 6.

I si sck r

Relationship between investor sentiment and stock

returns were analysed. The survey also made an attempt

to establish whether there exists any relationship between

stock market returns and investor sentiment. Besides

asking the respondents of their opinion, they were given

choices to statements showing relationship between stock

tbl 3: dil f rp ag sc f mk

Fc

mk Fc n f

rp

ag

sc

Margin Money Requirement 38 4.5

Listing Premium On Ipo 38 5.5Performance Of Small Capital Stock 29 4.2

Cash Position Of Mutual Fund 24 4.6

Closed End Fund Discount 13 4

New High And Lows 34 4.8

Opinion Of Investment Analyst 33 4.7

Credit Balance With Brokers 15 4.4

Earning Surprises 29 5.6

P/E Ratio 38 5.6

Price To Book Value 25 5.4

Stock Index Performance 40 7

Momentum Stock Behaviour 27 5

Yield On All Bonds 13 6

Other Factors

See Exhibit 4

exhibi 4: mk F c affcig I si


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However, 17.86 percent of the respondents stated that

high investor sentiment leads to high future returns, with

4.46 percentconsidered that high investor sentiment leads

to low future returns. The results are therefore clear that

both investor sentiment and stock returns inuence each

other. See Table 5.

tbl 5: I si sck r

s rig

High Investor Sentiment Leads io High Future

Returns

10%

High Investor Sentiment Leads to Lowfuture

Returns

5%

Past Returns Determine the Current InvestorSentiments

25%

Both Investor and Stock Returns Inuence Each

Other

62%

See Exhibit 8

exhibi 5: m Ip m k Fc affcig I

si

Table 4: Regulatory Factors Inuencing Investor Sentiments

rgl Fc rig

Regulation of Corporate Governace 68%

Grievance Mechanism Redressal 32%

Investor Education and Activism Not Signicant

Strenghtening of Market Surveillance System Not Signicant

Action Initiated Against Defaulters Not Signicant

Other Factors Not Signicant

exhibi 7: rgl Fc affcig I si

market and investor sentiment. All the respondents were

of the opinion that there exist relationship between the

two with difference in extent and magnitude. Out of

total responses, 55.36 percent of the respondents were

of the opinion that investor sentiment and stock returns

influence each other, whereas 22.32 percent opined

that past returns determine current investor sentiment. exhibi 8: I si sck r

exhibi 6: rlc f rgl Fc affcig I

si

rlc f rgl Fc


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performance. Additionally from a welfare perspective,

a better understanding of the sentiment traders and

arbitrageurs behaviour may support regulation,

taxation or education of these investors to ameliorate

adverse economic effects. This information will also

be important to regulators as they have to realign their

policies according to global nancial models.

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summary and ConCLusIons

In this study an attempt has been made to establish a

relationship between certain factors such as economic,

market, regulatory etc with the investor sentiment besides

knowing whether any relationship exists between investor

sentiment and stock returns. A survey was conducted

to obtain the information from different stakeholders in

the market system such as institutional investors, market

intermediaries and market regulators to understand these

relationships besides examining the denitional aspects

of investor sentiment. The critical factors were ranked on

the basis of relative importance (as shown by ranking of

the respondents) within each category separately. There is

no clear consensus among participants about the concept

of investor sentiment. However, about fty percent of

them feel that investor sentiment implies Understanding

of investor behaviour that influences stock market

activity and a quantitative measure to gauge the levels

of optimism or pessimism present in the market.

The key economic factors that impact investor

sentiment are real GDP, corporate prots, rate of ination,

level of interest rates and liquidity in the economy, while

the market based factors are put call ratio, advance decline

ratio, earning surprises, P/E ratio and price to book value.

Majority of respondents believe that better regulatory

framework does inuence Investor Sentiment especially

with regard to legal provisions relating to corporate

governance and investor grievance redressal mechanism.

Most of the respondents also feel that investor sentiment

and market returns are highly correlated and in factinuence each other. Investor Sentiment approach has

a number of challenges characterising and measuring

uninformed need for investor sentiment. Much needs

to be done in this framework since the potential payoffs

of an improved understanding of investor sentiment are

substantial. Results of this survey will be a key input for

construction of investor sentiment index which could

be related with the trading decisions. This will be an

important input to capital budgeting decisions and their

interpretations. Since it has been seen that sentiment

affects the cost of capital, it may therefore have real

consequences for the allocation of corporate investmentsacross safer and more speculative rms.

The results have important policy and optimal

investment decision-making implications. The evidence

presented is relevant from the perspective of money

managers (professional investors), whose purpose is

to provide investors with an expected rate of return

on their investments, and heads of firms (CEOs)

whose compensations could be tied to the rms stock


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8. New Highs and Lows

9. Opinions of Investment Analysts

10. Credit Balance with Brokers

11. Earnings Surprises

12. PIE Ratio

13. Price to Book Value

14. Stock Index Performance

15. Momentum Stock Behaviour

16. Yield on Government Bonds/Yield on all Bonds

17. Any Other (please specify)

Q.lv: (a) Is there any relationship between regulatory environment of nancial markets and investor sentiment:

Yes/No

(b) If yes, tick the most important regulatory aspects that you think inuence the Investor sentiment.

1. Regulations relating to corporate governance and corporate disclosures

2. Grievance Redressal Mechanism

3. Investors Education and Activism

4. Strengthening of Market Surveillance Systems

5. Actions initiated against defaulters

6. Any other (Please specify)

Q.v: (a) Is there any relationship between investor sentiment and stock returns. Yes/No

(b) If yes, tick the relationship you consider to be the most appropriate:

1. High investor sentiment leads to high future returns.

2. High investor sentiment leads to low future returns

3. Past returns determine current investor sentiment.

4. Both, investor sentiment and stock returns inuence each other.

5. Any other (Please specify)

sj shgl ([email protected]) is Dean of the Faculty of Commerce and Business, University of Delhi. He has done his

Ph.D in Finance from University of Delhi. He is a Post Doctoral Commonwealth Fellow fromLondon School of Economics, UK. He has

completed three major research projects and authored a book as well. He has written more than 40 research papers in leading national and

international journals.

G. s. s ([email protected]) is Ph.D in Capital Markets from Department of Commerce, Delhi School of Economics, University of

Delhi. He specialises in the areas like nancial markets, nancial services, investment banking, and investment analysis and capital markets.

He is presently Associate Professor in the Department of Commerce at Shri Guru Nanak Dev Khalsa College, University of Delhi. He has

to his credit over 30 research papers and articles published in refereed journals, nancial newspapers and magazines.

ni rjp ([email protected]) is Ph.D from Department of Commerce, Delhi School of Economics, University of Delhi, in

the area of International Business. She is presently an Associate Professor in the Department of Commerce at Sri Aurobindo College (M),

University of Delhi. She has been associated with a major research project of Ministry of Corporate Affairs in the area of Behavioural

Finance (Investor Sentiments).


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Documents

Investors Sentiment in India Survey