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Determinants of investors' financial behaviour inTehran Stock ExchangeMahmood Yahyazadehfar a , Mohammad Reza Zali a & Hooman Shababi ba Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar,Iranb Rahedanesh Institute of Higher Education, Babol, Iran

Version of record first published: 13 Jan 2011.

To cite this article: Mahmood Yahyazadehfar, Mohammad Reza Zali & Hooman Shababi (2011): Determinants of investors'financial behaviour in Tehran Stock Exchange, Applied Economics Letters, 18:7, 647-654

To link to this article: http://dx.doi.org/10.1080/13504851003781416

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Determinants of investors’ financial

behaviour in Tehran Stock Exchange

Mahmood Yahyazadehfara,*, Mohammad Reza Zalia and HoomanShababib

aFaculty of Economics and Administrative Sciences, University ofMazandaran, Babolsar, IranbRahedanesh Institute of Higher Education, Babol, Iran

Decision-making and investors’ behaviours are affected by various factorsin Tehran Stock Exchange. Based on theoretical perspective, investorscollect the key information of decision-making by the study of macro- andmicro-levels of investment environments. To analyse the research data, pathanalysis and Linear Structural Relationships (LISREL) software are used.The results indicate that political factors with 62%, psychological factorswith 53%, economic factors with 47% and internal factors with 31% are themost important factors that affect the stocks trading in Tehran StockExchange. Political and psychological factors not only have direct effectbut also affect the investors’ financial decision-making indirectly (throughintended interest rate) 16 and 11%, respectively. The total effect of politicaland psychological factors on investors’ financial decision-making is 79 and64%, respectively.

I. Introduction

At the time of decision-making, investors concentrateon risk and return. In contrast to institutional inves-tors, personal investors often do not have extensiveinstruments for balancing these two variables. Factors

such as high economic and political volatility rate andinstability of rules and regulations lead to high risk inthe decision-making of stock exchange.All these factors lead to a secondary risk in capital

market that derives from unpredictable behaviour ofinvestors. This research seeks to find an answer to thisquestion: ‘Which factors affect investors’ financial

behaviour?’ Lintner (1956) stated that financial beha-viour studies and analyses the effect of informationalinterpreting and operating to solve personal structureddecision-making. It should be stated that not only thefinancial behaviour tries to indicate that rational beha-

viour is logical and correct, but also it tries to indicatethe application of psychological decision-making in

forecasting and recognizing financial markets. Studiesin these fields indicate that several factors affect thedecision-making of investors that can be categorizedinto two sets of macro- and micro-variables.1

Hartmann and Patrickson (1998) compared thebehaviour of managerial decision-makers with theexpected behaviour of newly empowered employeesin TQM programmes and suggested that, in additionto rational decision-making strategy, other strategiesshould also be included in training programmes. Theyalso concluded that training for individuals limited tothe normative models advocated within TQM ignoredthe evidence, which suggested that other decision stra-tegies could be just as effective. Indeed, training inrational models may encourage newly empoweredemployees to discontinue their adaptive behaviour.Froot and Dabora (1999) examined pairs of large,

Siamese twin’ companies whose stocks are tradedaround the world but have different trading and own-ership habitats. Twins pool their cash flow so, with

*Corresponding author. E-mail: m.yahyazadeh@umz.ac.ir1Hirshleifer (2001), Hunderson and Warr (2002), Murphy (2000), Shefrin (2000) and Siegel (1998).

Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online # 2011 Taylor & Francishttp://www.informaworld.com

DOI: 10.1080/13504851003781416

647

Applied Economics Letters, 2011, 18, 647–654

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integrated markets, twin stocks should move together.In contrast, the relative prices of twin stocks appearcorrelated with the markets where they are tradedmost, that is, a twin’s relative price rises when themarket on which it is relatively intensively tradedrises. They examined several explanations for thisphenomenon: discretionary uses of dividend incomeby parent companies, differences in parent expendi-tures, voting rights issues, currency fluctuations,ex-dividend-date timing issues and tax-induced inves-tor heterogeneity. The results showed that only thelatter hypothesis can explain some (but not all) of thefacts. They also found that country-specific sentimentshocks affect share price movements of locally tradedstocks in proportion to their local trading/ownershipintensity. Furthermore, investors are rational, butmarkets are segmented by frictions other than inter-national transactions costs, such as agency problems.Dreman et al. (2001) investigated the effective fac-

tors on investors’ behaviour in New York StockExchange (NYSE) on 309 investors. The resultsshow a slight difference among investors’ expecta-tions. They also believe that gossips and news thatare related to high return of stock might affect theinvestors’ purchase.National Association of Securities Dealers (NASD)

investigated different aspects of investors’ decision-making inUS stock exchange based on decision knowl-edge of investors and other effective factors on financialbehaviour in 2005. Data were gathered from 1086investors in stock exchange using a questionnaire of55 questions. Investors were selected between the agesof 21 and 69 and they had at least one decision-makingactivity (related to stocks, debentures or investmentmutual funds) during October 2002 to April 2003.The results showed that 50% of investors expectedstock exchange improvement, 34% expected stockexchange stability and 16% expected stock exchangedeclination in the near future, respectively. Although53% of investors believe that increase in decision-making knowledge is relatively important and 44% ofthem confirm this advancement is very important, 3%contend that this is not important. In addition, 40% ofinvestors believe that increase in interest rate leads tohigher stock prices, 25% believe in lower stock prices,23% do not have any comments and 12% believe thatthere is no relationship between interest rate and stocks’price. Finally, 80% of investors believe that balancesheet data of audited firms can be used to make anideal decision in stock exchange.Gang Zhou (2004) investigated the expectations

and inclinations of personal investors in China stockexchange. In this research, effective political, eco-nomic and cultural factors on stockholders’ beha-viours have been investigated. To analyse the effects,

2120 investors of this market have been interviewed.The results show that approximately 40% of investorsuse at least two investment instruments in theirdecision-making. Also, investors believe that eco-nomic factors are much more important than otherfactors in their decision-making and they use a com-bination of capital goods to reduce their risks.Security Industry Authority (SIA) organization

investigated stockholders’ needs and their decision-making process among 1504 investors with least assetsamount of $100 000 in US stock exchange in 2003. Theresults showed that investors’ reliability to financialdata and firms accounting were decreased because offinancial disgrace.McKinsey Institute made a comprehensive investi-

gation on investors’ decision-making in several coun-tries in 2002. The results indicated that, according todifferent regions of eastern Europe, Africa, LatinAmerica, Asia, North America and western Europe,accounting disclosure and financial indices are impor-tant factors that investors rely on when they want tomake a decision about stock exchanges. Furthermore,investors apply a combination of fundamental meth-ods, such as macro- and micro-investigation of firmsand industry, in their decision-making.ClaireA.Hill (1998) investigated the reaction of 1450

investors to political–social changes in South-east Asia.The investors’ assets were at least $30 000. To investi-gate the effect, 13 factors such as political economicsexpectations, failure in governmental planning, politi-cal leadership, foreign struggles, administrative anar-chy of government and internal political struggles andproblems were analysed. The researcher believes thatunpredictability of political environment, especially inthe case of South-east Asian countries whose politicalstructure is unstable, is the most important factor oninvestors’ decision-making and price volatility.Marston and Straker (2001) examined the impor-

tance of the investor relations function within the top80 continental European companies by reporting onthe result of a postal questionnaire. The results con-firmed that many continental European companieshave well established investor relations practices andthe function is growing in importance.Bolen and Cohen (2005) studied the dynamics of

investor cash flows in socially responsible mutualfunds. Consistent with anecdotal evidence, they foundthat the monthly volatility of investor cash flows islower in socially responsible funds than in conventionalfunds. In addition, annual flows in socially responsiblefunds are less sensitive to lagged negative returns thanflows in conventional funds, but more sensitive tolagged positive returns. They argued that these resultscan be explained by a nonfinancial component of theutility functions of socially responsible investors.

648 M. Yahyazadehfar et al.

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Sun and Hsiao (2006) examined the influences ofoverconfidence, mental accounting, regret aversionand self-control on the disposition effect of sellingwinners too early and holding losers too long. Theresults of empirical data analysis of 290 investors indi-cated that all four psychological factors have signifi-cant influences on the disposition effect. The findingsshowed that (1) overconfidence, mental accountingand self-control positively influence the dispositioneffect and (2) self-control negatively influences thedisposition effect. The results also indicated that self-control can reduce irrational behaviour of investor.The literature is summarized in Table 1.Based on the literature, the authors try to determine

the investors’ financial behaviour in Tehran StockExchange. The remainder of this article is categorizedinto two parts including Method and Material andDiscussion and Conclusion.

II. Method and Material

In this research, correlation method has been used.Correlation studies are categorized into two categoriesof correlation and regression analyses. According tothe main objective of this research, that is to determinethe effective factors on stockholders’ financialdecision-making, Linear Structural Relationships(LISREL) have been used.The statistical universe of this research is Tehran Stock

Exchange’s investors with at least two times stocks trad-ing record in the year 2007. To measure variables andgather information, the researcher’s questionnaire wasused. This questionnaire included 38 demographic (gen-der, education, occupation, investing volume in stockexchange and investing horizon) and special questions.In the special questions’ section, ranking indices (veryhigh = 6, high = 5, average = 4, low = 3, verylow = 2 and nothing = 0) were applied. Tables 4–7showpolitical factor, psychological factor, internal factorand expected return factor items, respectively.To design the primary questionnaire, 35 stock

buyers were questioned as the primary sample. In thisstage, reliability of the questionnaire was estimated82% using Alpha-Kronbach method. In the secondstage, to gather information from investors, the ques-tionnaire was distributed and collected in 1 week andat different hours. Ultimately, the final sample, whichwas selected based on simple sampling, included 135investors. In this stage, two questions with higher SDwere deleted to improve the reliability to 84%.Therefore, special questions decreased to 38 questions.In this research, four main hypotheses have been

used to investigate the financial behaviour of investors:

(1) Economic factors affect stockholders’ decision-making.

(2) Political factors affect stockholders’ decision-making.

(3) Psychological factors affect stockholders’decision-making.

(4) Internal factors affect stockholders’ decision-making.

III. Results

According to the given data, 10% of repliers had lessthan 3 stocks in their portfolios, 20% had 3 to 5 stocksin their portfolios, 30% had 5 to 9 stocks in theirportfolios and 40% had more than 10 stocks in theirportfolios. But based on rate of return, 20, 60 and 40%of repliers had an annual return of less than or equal to30, 30 to 50 and , 50%, respectively. But based oninvesting horizon, 20% of repliers informed theirinvesting period less than 2 months, 40% informed itbetween 2 and 6 months, 25% informed it between 6and 15 months and 15% informed it more than 15months. Stocks trading volume is shown in Table 2.On the whole, it can be concluded that 60% of

repliers had 5 to 17 stocks and had expected returnon 30 to 50% stocks. In addition, 50% of them tradestocks between 10 and 23 times. Thus, repliers haveenough knowledge to make financial decisions.Table 3 shows variables of economic factors. Based

on this table, 17.6 and 6.9% of repliers informed veryhigh and no interest rate, respectively. In addition,22.55, 35.87 and 14.1% of repliers estimated the effectof economic factors as very high, high and average,respectively.Political factors included 12 variables such as poli-

tical news, internal political events and internal gov-ernors’ comments. According to Table 4, repliersestimated the effect of political factors such as internalgovernors’ comments (44.3%), statements and boy-cotts (41.2%), cabinet changes (38.2%) and externalgovernors’ comments (38.2%) as very high.On the contrary, 2.3 and 53.4% of repliers esti-

mated political relations of Iran as very high andhigh, respectively.Consequently, on an average, 30.3% of repliers

estimated the effect of political factors as very high,and 42.7, 7.59, 7.33 and 6.9%of repliers estimated it ashigh, average, low, very low and nothing, respectively.Psychological factors can affect financial behaviour

of investors. According to Table 5, 49.6 and 26% ofrepliers estimated the effect of stock exchange autho-rities’ comments and released news, respectively, asvery high. In contrast, 24.4% of repliers informedthat comments of stock exchange consultants have

Determinants of investors’ financial behaviour 649

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Table1.Acomparative

analysisamongtheliterature

offinancialdecision-m

akingofinvestors

No.Researchtitle

Researcher(s)

Year

Market(s)

Researchvariables

Researchfindings

Strengthsandweaknessesof

theresearch

1Investigate

theeffective

factors

onfinancial

decision-m

akingof

investors

inNew

York

Stock

Exchange

(NYSE)

Dreman;

Johnson;

McGregor;

Slovic

2001

309investors

inNYSE

(1)Theeffect

ofmarket

trends

oninvestors’decision-

mak

ing;

(2)theeffectofeco-

nomicandpoliticalfactors

ondecision-m

aking;(3)the

degreeofrisk

sufferingof

investors

(1)New

sandgossipshavea

higheffect

oninvestors’

decision-m

aking;(2)there

are

nodifferencesbetween

thedegreeofrisk

andeco-

nomicandpoliticalfactors

ofinvestors

(1)Attentionto

thedegreeof

risk

takingbasedondiffer-

entcriteria;(2)investigate

theeffect

ofeconomicfac-

tors

anditsdifference

with

other

factors

2Investigate

theeffective

factors

onstocksprice

andinvestors’decision-

makingin

WallStreet

Stock

Exchange

National

Association

ofSecurities

Dealers

(NASD)

2005

1086investors

inWall

Street

Stock

Exchange

(1)Thedegreeofdecision-

makingknowledge;(2)the

effect

ofinterestrate

on

decision-m

aking;(3)finan-

cialdata

andtheireffect

on

decision-m

aking

(1)Anincreasingneedfor

financialknowledgeamong

investors;(2)directrelation-

ship

betweeninterestrate

andstocksprice;(3)the

effect

ofaudited

financial

data

oninvestors’decision-

making

(1)Extensivestatisticaluni-

verse;(2)attentionto

the

degreeofknowledgeof

investors

fordecision-

making;(3)prepare

adecision-m

akingmodel

3Theeffectivefactors

on

decision-m

akingabout

purchasingfirm

s’stocks

Zhou

2004

2120investors

(1)Economicfactors;(2)poli-

ticalfactors

Greaterim

portance

ofeco-

nomicfactors

Comprehensiveinvestigation

ofinvestors’needs

4Investigate

theaspectsof

decision-m

akingof

investors

inUSA

and

theeffectivefactors

on

decision-m

aking

SIA

2003

1504investors

(1)Investigate

theinvestors’

needs;(2)investigate

the

effect

ofmacrofactors

on

decision-m

aking;(3)inves-

tigate

theeffect

offirm

-level

factors

ondecision-m

aking

ofstockholders

(1)Declinationin

investors’

risk

taking(2)less

confi-

dence

tobalance

sheetdata

(1)Investigate

thetrendof

changein

stockholders’

decision-m

aking;(2)greater

effect

ofpsychologicalfac-

tors

onstockholders’

decision-m

aking

5Investigateandanalyse

the

politicalrisk

andits

effectsonstockholders’

decision-m

aking

Hill

1998

1450investors

ofSouth-

eastAsian

countries

(1)Politicaleconomicsexpec-

tations;(2)politicalleading;

(3)governmentprogrammes

(1)Unpredictabilityofpoliti-

calfactors

anditsgreat

effect

ondecision-m

aking;

(2)difference

amongpoliti-

calfactors’effectin

different

countries

(1)Definitionofpolitical

indices

thataffectdecision-

making;(2)compare

the

effect

ofeconomicsystem

soninvestors’decision-

making

6Mutualfundattributes

andinvestorbehaviour

Bolen,Cohen

2005

USmutual

funds

database

(1)Net

asset

valueper

share;

(2)totalnet

assetsofmutual

fund

Annualflowsin

socially

responsiblefundsare

less

sensitiveto

lagged

negative

returnsthanflowsin

con-

ventionalfunds,butmore

sensitiveto

lagged

positive

returns

–

7Theinfluence

ofinvestors’

psychologyondisposi-

tioneffect

Sun,Hsiao

2006

290investors

(1)Psychologicalfactors

(1)Overconfidence,mental

accountingandself-control

positivelyinfluence

thedis-

positioneffect;(2)self-

controln

egativelyinfluences

thedispositioneffect

–

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very high effect on stocks trading, but only 15.3% of

repliers estimated the effect of consulting services on

stocks trading as very high. According to the results,

on an average, 22.5, 31.2, 9.3, 6.53, 14.73 and 14.24%

of repliers estimated the effect of psychological factors

on stocks trading as very high, high, average, low, very

low and nothing, respectively.Internal factors can also affect financial decision-

making of investors. In this research, nine internal

factors, such as applying and acquaintingwith financial

Table 4. Average percentage of political factors

Political factorsVery high(%)

High(%)

Moderate(%)

Low(%)

Very low(%)

Nothing(%)

Missing(%)

Internal political news 34.4 32.1 13 3.8 13.5 1.7 1.5Internal political events 36.6 28.2 17.7 10.3 5.7 – 1.5Internal governors’ suggestions 44.3 32.7 6.1 1.5 7.8 6.1 1.5Foreign political news 32.1 35.9 3.8 9.9 8.8 8 1.5Foreign governors’ suggestions 38.2 44.3 0.8 10.7 4.5 – 1.5International pressures 26.7 54.2 7.7 9.9 – – 1.5Elections, etc. 25.2 46.6 6.9 3.8 7.6 8.4 1.5University students’ struggles,

etc.27.5 48.9 3.1 1.5 8.4 9.1 1.5

Cabinet changes 38.2 38.2 3.8 6.9 11.4 – 1.5Environmental changes 16.8 57.3 6.1 13.7 4.6 – 1.5Political relations 2.3 53.4 20.6 5.3 6.2 10.7 1.5Contracts and boycotts 41.2 40.5 1.5 10.7 4.6 – 1.5

Table 5. Average percentage of psychological factors

Psychological factorsVery high(%)

High(%)

Moderate(%)

Low(%)

Very low(%)

Nothing(%)

Missing(%)

Released news 26 29 15.1 12.5 15.6 0.3 1.5Stock exchange authorities’

suggestions49.6 16 5.3 0.9 16.8 9.9 1.5

Interview with firms’ managers 9.4 39.1 13.3 10.2 16.2 10.3 1.5Affiliates’ recommendations 22.9 27.5 10.7 6.9 13.7 16.8 1.5Associations’ informal news 15.3 46.6 5.3 9.2 11.5 10.6 1.5News of Internet sites 19.8 26 12.2 7.6 7.6 25.3 1.5Stockbrokers’ suggestions 24.4 29.8 5.3 2.3 21.4 15.3 1.5Consultancy services 15.3 35.1 6.1 3.1 18.3 20.6 1.5Consultancy firms 19.8 32.1 9.9 6.1 11.5 19.1 1.5

Table 2. Buying and selling volume in 2007

Buy Sell

No. Volume % Volume %

1 Less than 3 10 Less than 2 152 3–14 20 Between 2 and 9 353 14–23 35 Between 9 and 25 254 23–35 20 Over 25 255 Over 35 15 – –

Table 3. Frequency percentage of economic factors

Economic factorsVery high(%)

High(%)

Moderate(%)

Low(%)

Very low(%)

Nothing(%)

Missing(%)

Interest rate 17.6 13.7 20.6 31.3 8.4 6.9 1.5Financial investment

substitution23.4 61.8 13.7 1.5 0.1 0.8 1.5

Physical investmentsubstitution

20.6 28.2 3.1 5.3 25.2 16 1.5

Inflation rate 20.6 38.9 17.6 6.1 0.8 0.8 1.5

Determinants of investors’ financial behaviour 651

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proportions and efficiency of these proportions, wereused. Based on Table 6, 49.6% of repliers estimated

legal investors’ decision-making, 47.3% of repliers esti-mated the relationship between balance sheet items andstocks’ expected return, 45.8% of repliers estimatedliquidity strength and 41.2% of repliers estimated the

percentage of balance sheet items on investors’ finan-cial decision-making as very high.Consequently, 36.89, 9.93, 7.49, 6.59 and 3.9% of

repliers estimated the effect of internal factors oninvestors’ financial decision-making as very high,average, low, very low and nothing, respectively.In addition, as shown in Table 7, expected return

factors have considerable effect on investors’ financial

decision-making.

According to Table 7, 38.2% of repliers stated thatthey have enough information about risk and return.In contrast, 8.3% of repliers stated that they do nothave any information about risk and return.Furthermore, 44 and 39% of repliers stated that theyhave a lot of information about stocks return andstocks price trend, respectively. But 5.4% of repliersstated that they do not have any information aboutstocks return and their trends. Consequently, on anaverage, 40.5, 27.5, 11, 11, 5.6 and 2.77% of repliersstated that they have very high, high, average, low,very low and no expectations from their stocksreturns, respectively.Table 8 shows a correlation among political, eco-

nomic, psychological, internal and financial

Table 6. Average percentage of internal factors

Internal factorsVery high(%)

High(%)

Moderate(%)

Low(%)

Very low(%)

Nothing(%)

Missing(%)

Applying financial proportions 19.1 46.6 6.1 11.5 5.3 9.9 1.5Knowing financial proportions 22.1 42.7 17.6 0.8 6.9 8.4 1.5Financial proportions’ efficiency 33.6 31.3 16 13 4.6 – 1.5Balance sheet items 41.2 22.9 15.3 3.1 7.6 8.4 1.5Trust to balance sheet data 31.3 49.9 2.3 10.7 4.3 – 1.5Relationship between balance sheet data and

stock profit returns47.3 13.7 19.1 9.2 9.2 – 1.5

Trading volume 42 35.9 3.8 6.9 5.3 4.6 1.5Legal investors’ decision-making 49.6 25.2 6.9 1.5 11.5 3.8 1.5Cashing power 45.8 35.1 2.3 10.7 4.6 – 1.5

Table 7. Average percentage of expected return

Expected return variable Very high (%) High (%) Moderate (%) Low (%) Very low (%) Nothing (%) Missing (%)

Risk and return 38.2 27.5 6.1 11.5 6.9 8.3 1.5Earning yield 44.3 26 13 10.7 4.5 – 1.5Stock price trend 38.9 29 13.7 11.5 5.4 – 1.5

Table 8. The correlation between research factors and purchase decision-making variable

FactorsCorrelationcoefficient

Purchasevariable

Sellingvariable

Decision-making variable (buyingand selling stocks)

Economic Pearson 0.452 0.556 0.623Sig (two-tailed) 0.000 0.000 0.000N 131 131 131

Political Pearson 0.62 0.712 0.736Sig (two-tailed) 0.000 0.000 0.000N 131 131 131

Psychological Pearson 0.688 0.642 0.703Sig (two-tailed) 0.000 0.000 0.000N 131 131 131

Internal Pearson 0.481 0.581 0.731Sig (two-tailed) 0.000 0.000 0.000N 131 131 131

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decision-making (buying and selling stocks) factors.

Based on this table, economic, political, psychologi-

cal and internal factors have a significant relation-

ship with financial decision-making of investors. For

example, the greatest relationship exists between

political and financial decision-making factors

(r=0.736) and the lowest relationship exists between

economic and stocks buying factors (r = 0.452).

Strong correlation among research variables indi-

cates that path analysis method can be used to inves-

tigate direct and indirect effects of these four factors

on financial decision-making. Figure 1 shows the

path analysis results based on LISREL software

outputs.According to Table 8, political factors such as gover-

nors’ comments and internal and external changes had

the greatest effect on financial decision-making of inves-

tors with 62%of direct effect and 17%of indirect effect.As shown in Fig. 1, psychological, economic and

internal factors have 53, 47 and 32% effect on inves-

tors’ decision-making in Tehran Stock Exchange,

respectively.To determine whether the above path analysis is

statistically suitable, Root Mean Square Error of

Approximation (RMSEA) should be analysed.

RMSEA will measure the error of the statistical uni-

verse and is a function of sample, degree of freedom

and model’s estimation. In this research, RMSEA is

0.0113, that is less than 0.5, and it shows that the

accuracy of the model is high.Based on the path analysis results, expected return

has 49% direct effect on financial decision-making of

investors and it derives from political and psychologi-

cal factors. On the contrary, expected return plays as

an intermediary variable. Political and psychological

factors have 17 and 22% of direct effect on expected

return, respectively.In addition to the direct effect, political and psycho-

logical factors have an indirect effect also on stock-

holders’ decision-making. Direct effect of internal and

psychological factors derives from the multiplication of

the direct effect of these factors on expected return and

stockholders’ financial decision-making. According to

Table 9, indirect effect of political factors on financial

decision-making equals 17% (0.34 · 0.49) and the

indirect effect of psychological factors on final depen-

dent variable equals 11% (0.22 · 0.49). Consequently,

the total effect of political and psychological factors

(direct effect + indirect effect) on financial decision-

making of investors in Tehran Stock Exchange equals

79 and 64%, respectively. In addition, the total effect of

economic factors, internal factors and expected rate of

return are 47%, 31% and 49% respectively. As shown

in Table 9, the political factor has most direct and

indirect effect on financial decision making of investors

in Tehran Stock Exchange.

Table 9. Direct, indirect and total effect of effective factors on financial decision-making

Type of effect

No. Variable Direct Indirect Total

1 Political factors (governors’ statements, environmental changes) 0.62 0.17 0.792 Psychological factors (released news in public media, affiliates’ recommendations, etc.) 0.53 0.11 0.643 Economic factors (interest rate, inflation rate, investment replacements, etc.) 0.47 – 0.474 Internal factors (trading volume, balance sheet items, financial ratio, stock return, trading

volume, etc.)0.31 – 0.31

5 Expected rate of return 0.49 – 0.49

Source: Data were gathered from individual investors of Tehran Stocks Exchange using questionnaire.

Political factors Internal factors Economic factors

Decision-makingExpected rate of return

Psychological factors

0.530.22

0.49

0.470.310.620.17

Fig. 1. Path analysis of effective factors on stockholders’ financial decision-making

Determinants of investors’ financial behaviour 653

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IV. Discussion and Conclusion

Political, psychological and economic factors, expectedreturn and also internal factors (as an intermediary)affect the dependent variable including decision-makingin buying and selling of stocks. These effects are asfollows:

(1) The path coefficient of political factors is equalto 0.62, due to factors such as internal andexternal governors’ comments and internaland external political changes. These factorshave the strongest direct effect on financialdecision-making of investors (see Table 4).

(2) Psychological factors as the second variablehave a path coefficient equal to 0.53, due tofactors such as released news in public media,gossips, brokers’ comments, affiliates’ recom-mendations, stock exchange authorities’ com-ments, interview with firms’ managers andinformal board of directors’ reporting. Thesefactors also have a direct effect on financialdecision-making of investors (see Table 5).

(3) Economic factors such as interest rate, inflationrate and investment substitutionswith path coef-ficient equal to 0.47 is the third variable that hasa direct effect on financial decision-making ofinvestors. It means that if the economic condi-tions of the country are suitable, investors willbuy more stocks and vice versa (see Table 3).

(4) Internal factors are also another variable hav-ing the least effect on the financial decision-making of investors and have a path coefficientequal to 0.31. In other words, internal factorssuch as balance sheet items and extracted finan-cial ratios have the least effect on financialdecision-making of investors (see Table 6).

(5) Another variable that affects the financialdecision-making of investors is the expectedreturn. The path coefficient of this variable isequal to 0.49 and it depends on factors such asrisk and return data and stock price trends (seeTable 7).

Consequently, according to the above discussions,it can be concluded that due to lack of informationobjectivity and enough financial experts, most of the

decisions in Tehran Stock Exchange are made basedon political and psychological factors. Thus, it is theresponsibility of governors and stock exchange autho-rities to prepare necessary prerequisites for optimaldecision-making of investors.

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