Individual Investor Behaviour on the Shenzhen Stock Exchange

Abstract

Investigations of investor behaviour currently adopt one of three major viewpoints. From a macro perspective, studies tend to focus on the relationship between stock market indices and macro-economic indicators such as exchange rates, interest rates and consumer price index. From the firm’s perspective, studies focus on the impact of the firm’s management on stock price movements. From the micro perspective, the impact on individual investor behaviours has received attention. While these studies are informative, the theoretical underpinnings differ between each context. While macro and firm-level studies tend to assume rational decision-making and efficient markets, studies of the micro perspective highlight the behavioural underpinnings of investor choice. Moreover, these studies overwhelmingly focus on Western market contexts. Few consider East Asian markets which encompass different circumstances that affect investor behaviour. This study addresses these issues. First, it provides a comparative assessment of influences on investor behaviours among macro, firm-level and micro perspectives. To investigate macro-economic influences the study adopts cointegration analysis of monthly data covering the period 2001 to 2010, to assess the relationship between macro-economic variables and stock market volatility. To examine firm-level context for individual investors, 15 interviews were conducted with senior executives from five major companies listed on the Shenzhen Stock Exchange (SZSE). This study also uses a survey of n=193 respondents to explore individual investor behaviour on the SZSE. Second, these studies all focus on the SZSE. This enables a close examination of factors specific to the Chinese context. The study produced several major findings. The correlation between stock market volatility and macro-economic indicators was found to be relatively weak. For firms, the study finds considerable agency problems and ineffective investor relations functions, thus reducing the perceived trustworthiness of these firms for investors. However, the study does find that micro-level factors, such as financial knowledge, herd behaviour and mental account, do have significant effects on investment income. These findings contrast with those recorded in Western contexts.