Factors Influencing Individual Investor Behavior

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Factors Influencing Individual Investor Behaviour: An Empirical study of the
UAE Financial Markets,The Business Review, Cambridge, Vol.5,No. 2,225-232,
2006.
Article · January 2006
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Factors Influencing Individual Investor Behavior: An Empirical study of the
UAE Financial Markets
Hussein A. Hassan Al-Tamimi
Associate Professor
Department of Business Administration
College of Business and Management
University of Sharjah
P.O.Box 27272 ,Sharjah
United Arab Emirates
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Factors Influencing Individual Investor Behavior: An Empirical study of the
UAE Financial Markets
Abstract
This paper aims at identifying factors influencing the UAE investor behavior. It
develops a modified questionnaire. The questionnaire included thirty four items that
belonge to five categories, namely, self-image/ firm-image co-incidence; accounting
information; neutral information; advocate recommendations; and personal financial
needs. Six factors were found to be the most influencing factors on the UAE
investor behavior. The most influencing factor was in order of importance: expected
corporate earnings, get rich quick, stock marketability, past performance of the
firm’s stock, government holdings and the creation of the organized financial
markets. On the other hand, five factors were found to be the least influencing
factors on the UAE investor behavior. The least influencing factors in order of
importance were: expected losses in other local investments, minimizing risk,
expected losses in international financial markets, , family member opinions, gut
feeling on the economy. Two factors had unexpectedly least influence on the
behavior of the UAE investors behavior, namely the religious beliefs and the factor
of family member opinions.
JEL Classification: G1;G11
Keywords: Behavioral Finance; Investor Behavior; Influencing Factors
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Factors Influencing Individual Investor Behavior: An Empirical study of the
UAE Financial Markets
1.Introduction
Research in behavioral finance is relatively new. Within behavioral finance
it is assumed that information structure and the characteristics of market
participants systematically influence individuals’ investment decisions as well as
market outcomes. According to behavioral finance, investor market behavior
derives from psychological principles of decision making, to explain why people
buy or sell the stocks. Behavioral finance focuses upon how investors interpret
and act on information to make investment decisions. In addition, the behavioral
finance places an emphasis upon investor behavior leading to various market
anomalies.
Behavioral finance is defined by Shefrin(1999) as “ a rapidly growing area that
deals with the influence of Psychology on the behavior of financial practitioners”.
Behavioral finance research is developing rapidly and now beginning to answer
such questions as(see Taffler 2002):
• Why, when all the evidence shows investors cannot beat the market on any
systematic basis, they still resolutely do?
• How can we explain the stock market “bubbles” ?
• Why is the volume of trading in financial markets so excessive and why is the
stock market so volatile?
• Why do investment analysts have so much difficulty in identifying under-and
overvalued stocks?
• Why do stock prices appear to under-react to bad news?
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• why are acquisitions on average turn to be unsuccessful?
• Why do corporate managers find it so difficult to terminate loss making
projects?
• Why do most boards believe their companies are undervalued by the
stock market?
• Why should new issues exhibit short-run stock market out-performance and
then long-run under-performance?
A better understanding of behavioral processes and outcomes is important for
financial planners because an understanding of how investors generally respond
to market movements should help investment advisors in devising appropriate
asset allocation strategies for their clients.
This study aims at exploring the UAE investor’s behavior, representing the
first attempt to be undertaken in the UAE. The study is important for individual
investor, companies listed in Dubai Financial Market and Abu Dhabi Securities
Market and Government. For investors as decision makers, the most influencing
factor/ factors on their investment decision is crucial because this would affect their
future financial plans. For companies, identifying the most influencing factors on
their investors’ behavior would affect their future policies and strategies. Finally, for
government, identifying the most influencing factors on investors’ behavior would
affect the required legislations and the additional procedures needed in order to
satisfy investors’ desires and also to give more support to market efficiency.
Trading volume of Dubai Financial Market and Abu Dhabi Securities Market was
highly fluctuated as Table 1, and Figures1 and 2, shown. Fluctuations in trading
volume indicates somehow the abnormal behavior of the UAE investor, which needs
to be investigated and this is the motivation behind the current study
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Table 1
Trading Volume of Duabi Financial Market and Abu Dhabi Securities
Market During the Period 2003-2004
Period Duabi Financial Market Abu Dhabi Securities Market
2003
January 5,810,252 15,927,660
Febrauary 7,748,459 5,582,589
March 16,008,869 4,003,950
April 9,417,368 10,284,210
May 16,217,862 12,209,402
June 9,255,823 23,468,035
July 46,579,561 15,508,190
August 17,785,482 19,896,455
September 37,724,421 34,467,643
October 38,246,562 33,845,497
November 27,743,935 19,883,296
December 93,697,467 37,126,854
2004
January 111,204,827 87,969,112
Febrauary 46,144,565 38,400,211
March 244,893,780 35,091,246
April 365,478,972 93,182,281
May 150,895,966 86,346,984
June 366,446,335 59,160,709
July 441,703,603 138,016,805
August 127,241,159 39,240,433
September 898,623,465 67,343,937
October 440,009,032 45,759,762
November 746,605,336 44,460,144
December 1183,052,359 212,184,240
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Figure 2
Trading Volume of Dubai Financial Market and Abu
Dhabi Securities Market in 2004
0
200
400
600
800
1,000
1,200
1,400
1 2 3 4 5 6 7 8 9 10 11 12
Months No. of Stocks
Abu Dhabi
Securities
Market
Dubai Financial
Market
Figure 1
Trading Volume of Dubai Financial Market and Abu Dhabi Securities
Market in 2003
0
10
20
30
40
50
60
70
80
90
100
1 2 3 4 5 6 7 8 9 10 11 12
Months
No. of
Stocks
Abu Dhabi
Securities Market
Dubai Financial
Market
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2.Literature Review
In this paper a comprehensive literature review about behavioral finance in
general is beyond the scope of the paper. Instead, the results of some empirical
studies about individual investor behavior will be highlighted. It should be noted
here that a substantial amount of attention has been given by researchers to the
institutional investor behavior, whereas less attention has been given to the
individual investor behavior which is the emphasis of this paper. However,
almost all these studies have dealt with investor’s behavior in industrialized
countries (e.g. USA, UK, Canada).
Kadiyala and Rau(2004) investigated investor reaction to corporate event
announcements. They concluded that investors appear to under react to prior
information as well as to information conveyed by the event, leading to the
different patterns: return continuations and return reveals, both documented in
long-horizon return. They found no support for the overreaction hypothesis.
Merikas et.al.,(2003) adopted a modified questionnaire to analyze factors
influencing Greek investor behavior on the Athens Stock Exchange. The results
indicate that individuals base their stock purchase decisions on economic criteria
combined with diverse other variables. They do not rely on a single integrated
approach, but rather on many categories of factors. The results also revealed that
there is a certain degree of correlation between the factors that behavioral finance
theory and previous empirical evidence identify as the influencing factors for the
average equity investor, and the individual behavior of active investors in the
Athens Stock Exchange(ASE) influencing by the overall trends prevailing at the
time of the survey in the ASE.
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Malmendier and Shanthikumar(2003) tried to answer the question: Are small
investor naïve?. They found that large investors generate abnormal volumes of
buyer-initiated trades after a positive recommendation only if the analyst is
unaffiliated. Small traders exert abnormal buy pressure after all positive
recommendations, including those of affiliated analysts.
Hodge(2003) analyzed investors’ perceptions of earnings quality, auditor
independence, and the usefulness of audited financial information. He concluded
that lower perceptions of earnings quality are associated with greater reliance on a
firm’s audited financial statements and fundamental analysis of those statements
when making investment decisions.
Krishnan and Booker(2002) analyzed the factors influencing the decisions
of investor who use analysts’ recommendations to arrive at a short-term decision to
hold or to sell a stock. The results indicate that a strong form of the analyst summary
recommendation report, i.e., one with additional information supporting the analysts’
position further, reduces the disposition error for gains and also reduces the
disposition error for losses
Nagy and Obenberger(1994) examined factors influencing investor
behavior. They developed a questionnaire includes (34) questions. Their
findings suggested that classical wealth – maximimization criteria are important
to investors, even though investors employ diverse criteria when choosing
stocks. Contemporary concerns such as local or international operations,
environmental track record and the firm’s ethical posture appear to be given only
cursory consideration. The recommendations of brokerage house, individual
stock brokers, family members and co-workers go largely unheeded. Many
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individual investors discount the benefits of valuation models when evaluating
stocks.
Epstein(1994) examined the demand for social information by individual
investors. The results indicate the usefulness of annual reports to corporate
shareholders. The results also indicate a strong demand for information about
product safety and quality, and about the company’s environmental activities.
Furthermore, a majority of the shareholders surveyed also want the company to
report on corporate ethics, employee relations and community involvement.
De Bondt et al.,(1985) published a paper about behavioral finance in which
they asked the following question: “ Dos the stock market overreact?”, the article
gave evidence to support the hypothesis that cognitive bias ( investor overreaction
to a long series of bad news could produce predictable mispricing of
stocks traded on the NYSE.
The main findings of the above studies can be summarized as follows:

  1. There is no support for the overreaction hypothesis.
  2. Investor over-reaction to a long series of bad news could produce predictable
    mispricing of stocks
  3. Classical wealth – maximimization criteria are important to investors.
  4. The recommendations of brokerage house, individual stock brokers, family
    members and co-workers go largely unheeded
  5. A strong demand for information about product safety and quality, and about
    the company’s environmental activities
  6. There exist a strong form of the analyst summary recommendation report, i.e.,
    one with additional information supporting the analysts’ position further,
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    reduces the disposition error for gains and also reduces the disposition error
    for losses
  7. Research Methodology
    3.1 Research Questions
    This study intends to answer the following questions:
    QUESTION 1: Does the factors related to self- image/firm-image co-incidence
    have an effect on the behavior of the UAE investor?, if so, what is the relative
    importance of the effect of each factor on such behavior?
    QUESTION 2: Does the factors related to accounting information have an effect
    on the behavior of the UAE investor ?, if so, what is the relative importance of the
    effect of each factor on such behavior?
    QUESTION 3: Does the factors related to neutral information have an effect on the
    behavior of the UAE investor?, if so, what is the relative importance of the effect of
    each factor on such behavior?
    QUESTION 4: Does the factors related to advocate recommendations have an
    effect on the behavior of the UAE investor?, if so, what is the relative importance of
    the effect of each factor on such behavior?
    QUESTION 5: Does the factors related to personal financial needs have an effect
    on the behavior of the UAE investor?, if so, what is the relative importance of the
    effect of each factor on such behavior?
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    3.2.The Questionnaire
    This paper developed a modified questionnaire to examin the behavior of
    the UAE investor. The questionnaire items represent five categories, namely selfimage/
    firm-image coincidence; accounting information; neutral information;
    advocate recommendation; and personal financial needs. Based on this questionnaire,
    the most important item and the most important category will be identified. The
    developed questionnaire includes thirty four items where ten items correspond to
    self-image/ firm-image coincidence category, seven items correspond to accounting
    information category. Seven items correspond to neutral information category, four
    items to advocate recommendation and six items to personal financial needs.
    Respondents were asked to indicate their degree of agreement with each of the items
    on seven-point Likert scale.
    The current study considers two factors in which they are not considered
    before by previous published studies, namely the religious values beliefs and the
    creation of the organized financial markets( i.e. Dubai Financial Market and Abu
    Dhabi Securities Market). For the first factor, it is assumed that the religious reasons
    should have a strong effect on the behavior of the UAE investor because of the vital
    role of this factor in the UAE society as a Moslem and conservative society. It is also
    hypothesized that the creation of the two organized financial markets in this
    country, would have a positive effect on the behavior of the UAE investors..
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    3.3. Data Collection
    In order to get the answer on the research questions, 350 questionnaires were
    randomly distributed to 350 individual investors in both Dubai Financial Market and
    Abu Dhabi Securities Market. It is worth noting here that the number of investors
    who dealt with Abu Dhabi Securities Market was 66,772 investors and 154,041
    investors of Dubai Financial Market at the end of 2004. Local investors constitutes a
    large proportion of total investors. For example at the end of 2004 this proportion
    was around 94% in Abu Dhabi Securities Market and 89.5% in Dubai Financial
    Market. The high proportion of local investors is mainly attributed to the current
    regulations in which foreign investors are not allowed to hold shares of certain local
    companies(i.e. the most popular and well known companies). The data provided
    were then examined, the screening process resulted in excluding seven(7) responses
    from the study because of missing data items. The remaining responses 343 represent
    an effective response rate of around 98 percent of the total sample. The number of
    usable responses received was 203 responses from Dubai Financial Market and 140
    responses from Abu Dhabi Securities Market.
    3.4. Reliability of the Measures
    Reliability of the measures was assessed with the use of Cronbach’s alpha.
    Cronbach’s alpha allows us to measure the reliability of the different categories. It
    consists of estimates of how much variation in scores of different variables is
    attributable to chance or random errors (Selltzm, et al., 1976). As a general rule a
    coefficient greater than or equal to 0.5 is considered acceptable and a good indication
    of construct reliability ( Nunnally,1976). The overall Cronbach’s alpha for the five
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    categories is (0.824). The Cronbach’s alpha for the five categories, namely, selfimage/
    firm-image coincidence, accounting information, neutral information,
    advocate recommendation and personal financial needs is (0.778), (0.790), (0.651),
    (0.610), (0.640) respectively. Cronbach’s alpha show that these categories are
    reliable.
  8. Results
    Table 2, provides the means and the standard deviations of the five groups of
    the factors influencing the UAE investors behavior. All the calculated means for the
    Table 2
    Means and Standard Deviation of the Five Groups of the Factors Influencing the
    UAE Investors Behavior
    1.Self-Image/Firm-Image Coincidence
  9. Relegious reasons
  10. Feelings for a firm’s products and services
  11. Reputation of the firm’s shareholders
  12. “Get rich quick”
  13. Firm status in industry
  14. The creation of the organized financial
    markets( i.e. Dubai Financial Market and Abu Dhabi Securities Markets)
  15. Perceived ethics of firm
  16. Gut feeling on the economy
  17. Reputation of the firm
    10.Increase of the firm’s involvement in solving community problems
    Mean 5.5085
    Std. Deviation .8548
    2.Accounting Information
  18. Stock Marketability
  19. Expected corporate earnings
    13.Condition of financial statements
  20. Dividends paid
  21. Affordable share price
  22. Expected Dividends
  23. Past performance of the firm’s stock
    Mean 4.4067
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    Std. Deviation 1.1832
    3.Neutral Information
  24. Government holdings
  25. Information obtained from the internet
  26. Fluctuation/developments in the stock index
  27. Coverage in the press
  28. Statements from government officals
  29. Current economic indicators
  30. Recent price movement in a firm’s stock
    Mean 5.9821
    Std. Deviation .9180
    4.Advocate Recommendation
  31. Broker recommendation
    26.Family member opinions
  32. Friend or coworker recommendations
  33. Opinions of the firm’s majority stockholders
    Mean 5.4731
    Std. Deviation .7894
    5.Personal Financial Needs
  34. Attractiveness of non-stock investment
  35. Diversification needs
  36. Ease of obtaining borrowed funds
  37. Minmizing risk
  38. Expected Losses in international financial
    markets
  39. Expected Losses in other local investments
    Mean 4.2745
    Std. Deviation .9703
    five groups is greater than 4 out of the maximum answer, which is based on sevenpoints
    Likert scale. The calculated means indicate a positive answer for the first
    part of the five questions of this study. In other words all the 34 factors included in
    the questionnaire are somehow affecting the UAE investor decisions. The most
    important group was by order of importance: the neutral information, self-image/
    firm-image coincidence, advocate recommendation, accounting information, and
    personal financial needs. However, the calculated means do not give an answer to
    the second part of the five questions, which is the most important part of this study,
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    namely the relative importance of the effect of each factor on the behavior of the
    UAE investor. The effect of each factor of the 34 factors will be examined bellow:
    Table 3, shows the frequency distribution of variables that significantly
    influence the UAE investor behavior. A more complete picture however, is presented
    Table 3
    Frequency Distribution of Variables that Significantly Influence the UAE Investor
    Behavior
    Item Frequency Percent
  40. Expected corporate earnings
    223 65%
    2.“Get rich quick” 209 60.9%
  41. Stock Marketability 185 53.9%
  42. Past performance of the firm’s stock 181 52.6%
  43. Government holdings 180 52.3%
  44. The creation of the organized financial
    markets( i.e. Dubai Financial Market& Abu
    Dhabi Securities Markets)
    176 51.3%
  45. Dividends paid.
    159 46.4%
    8.Condition of financial statements
    152 44.2%
  46. Expected Dividends 152 44.2%
  47. Current economic indicators
    147 42.7%
  48. Affordable share price
    146 42.4%
    12.Reputation of the firm
    126 36.6%
  49. Statements from government officals
    132 38.5%
  50. Recent price movement in a firm’s stock
    122 35.5%
  51. Perceived ethics of firm 100 29.1%
  52. Ease of obtaining borrowed funds 95 27.6%
  53. Reputation of the firm’s shareholders
    93 27%
  54. Firm status in industry
    92 26.7%
  55. Fluctuation/developments in the stock index
    86 25%
    20.Increase of the firm’s involvement in
    solving community problems
    84 24.4%
  56. Relegious reasons
    80 23.3%
  57. Feelings for a firm’s products and services
    78 22.7%
  58. Broker recommendations
    60 11.3%
  59. Coverage in the press
    57 16.6%
  60. Information obtained from the internet
    42 12.2%
  61. Opinions of the firm’s majority
    stockholders
    39 9.3%
  62. Friend or coworker recommendations
    33 9.6%
  63. Attractiveness of non-stock investment 32 9.3%
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  64. Diversification needs
    32 9.3%
  65. Gut feeling on the economy
    31 9%
    31.Family member opinions 29 8.4%
  66. Expected losses in international financial
    markets
    28 8.1%
  67. Minmizing risk
    24 7%
  68. Expected losses in other local investments 18
    5.2%
    in Table 4, which shows the same data sorted according to those factors that have
    the least influence on the UAE investor behavior. It can be seen from Table 4 that
    most of the variables that were rated important are classical wealth maximization
    criteria such as; the “ expected corporate earnings”, and “get rich quick”. This is
    consistent with Merikas et. al.,(2003) findings. Under the wealth maximization
    criteria, four factor, were also significantly affecting the UAE investor behavior,
    namely past performance of the firm’s stock, dividends paid, condition of financial
    statements, and expected dividends, these factors were ranked 4,7, 8, and 9
    respectively.
    Other factors were also significantly affected the UAE investors behavior, for
    example the UAE investors are more interested in stock marketability. This would
    affect the policies that to be followed by companies listed in the two financial
    markets. For example, in order to increase their stock marketability, they need to
    review frequently, the relationship between the price and demand on their stocks. If
    the stock price is too high, this might make it difficult to sell, and one of the
    policies can be adopted by companies to make it more marketable is a stock split.
    Government holdings is also a significant factor of the UAE investor behavior,
    where more than 50% of total respondents consider this factor, the most influencing
    factor on their investment decision. It should be mentioned here that there are a
    large number of shares of listed companies which are being held by the UAE
    government. Finally, another factor which was sugested by respondents as the most
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    influencing factor on the UAE investor behavior, is the creation of the organized
    financial markets( i.e. Dubai Financial Market and Abu Dhabi Securities Markets).
    Around 51% of total respondents indicated that this factor was the most influencing
    factor on their investment decision, which reflects the vital role of the
    Table 4
    Frequency Distribution of Variables that Least Influence the UAE Investor Behavior
    Item Frequency Percent
  69. Expected losses in other local investments
    57 16.6 %
    2.Family member opinions
    38 11 %
  70. Friend or coworker recommendations
    33 9.6 %
  71. Information obtained from the internet
    29 8.4 %
  72. Opinions of the firm’s majority stockholders 27 7.8 %
  73. Attractiveness of non-stock investment 26 7.6 %
  74. Ease of obtaining borrowed funds 25 7.3 %
  75. Relegious reasons
    20 5.8 %
  76. Expected losses in international financial
    markets
    19 5.5 %
    10.Increase of the firm’s involvement in
    solving community problems
    18 5.2 %
  77. Minmizing risk
    18 5.2 %
  78. Gut feeling on the economy
    18 5.2 %
  79. Broker recommendations
    16 4.7 %
  80. Diversification needs
    15 4.4 %
  81. Affordable share price
    8 2.3 %
  82. Coverage in the press
    7 2.2 %
  83. Expected Dividends 6 1.7 %
  84. Statements from government officals
    6 1.7 %
  85. Government holdings 5 1.5 %
  86. The creation of the organized financial
    markets( i.e. Dubai Financial Market& Abu
    Dhabi Securities Markets)
    5 1.5 %
  87. Perceived ethics of firm 5 1.5 %
  88. Current economic indicators
    4 1.2 %
  89. Reputation of the firm’s shareholders 4 1.2 %
  90. Firm status in industry
    4 1.2 %
  91. Stock Marketability 4 1.2 %
  92. Recent price movement in a firm’s stock
    3 0.9%
  93. Feelings for a firm’s products and services
    3 0.9%
  94. Past performance of the firm’s stock 2 0.6 %
  95. Fluctuation/developments in the stock index
    2 0.6 %
  96. “Get rich quick 1 0.3 %
  97. Reputation of the firm
    1 0.3 %
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  98. Expected corporate earnings
    1 0.3 %
    33.Condition of financial statements
    1 0.3 %
  99. Dividends paid 1 0.3 %
    two financial markets. It should be mentioned here that, the UAE investors were not
    familiar with the organized financial markets five years ago, in which both of the
    two financial markets were established in 2000.
    Some factors had unexpectedly least influence on the behavior of the UAE
    investor behavior. For example, in the case of the religious reasons, only 80
    respondents or 23% of total response consider this factor as the most influencing
    factor on the UAE investors do not behavior. For the UAE society as a Moslem
    society, and as it was mentioned before the religious reasons factor was expected to
    be considered by a large number of respondents as the most influencing factor on
    their investment decision. This is mainly because most the UAE investors don’t like
    to invest their money in the conventional banks in order to avoid adding interest on
    their investment which is forbidden from an Islamic point of view. The other
    unexpected responses were those related to family member opinions, in which only
    29 respondents or about 8% of total responses consider this factor as the most
    influencing factor on the UAE investor behavior. The least influencing factors on the
    behavior of the UAE investor were clearly presented in Table 4. It is iterested to
    note that almost the same factors listed on the top of Table 3, became on the bottom
    of Table 4.
    Regarding the five groups of factors influencing the UAE investor behavior,
    the most influencing factors were found belong accounting information group,
    namely expected corporate earnings, stock marketability, past performance of the
    firm’s stock, dividends paid, condition of financial statements and expected
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    dividends. Clearly for companies listed in Dubai Financial Market& Abu Dhabi
    Securities Markets, require to give more attention to these factors in order to satisfy
    the desires of their investors and also to attract more investors to deal with their
    stocks. The second group was self-image/ firm-image coincidence group in which
    there were three factors influence the UAE investor behavior, namely get rich quick,
    reputation of the firm and perceived ethics of firm. The third group was neutral
    information, followed by advocate recommendation and the last group was
    personal financial needs.
  100. Summary and Conclusions
    In this paper factors influencing the UAE investor behavior on Dubai
    Financial Market and Abu Dhabi Securities Market were examined. The paper
    develops a modified questionnaire. The questionnaire included thirty four items that
    belonge to five categories, namely self-image/ firm-image coincidence; accounting
    information; neutral information; advocate recommendation; and personal financial
    needs. Six factors were found the most influencing factors, where more than 50% of
    total respondents consider these factors as the most affecting factors on their
    behavior. The most influencing factor was by order of importance: expected
    corporate earnings, get rich quick, stock marketability, past performance of the
    firm’s stock, government holdings, the creation of the organized financial market(
    i.e. Dubai Financial Market& Abu Dhabi Securities Markets). Five factors were
    found the least influencing factors, where less than 10% of total respondents consider
    these factors as the least affecting factors on their behavior. The least influencing
    factor was by order of importance: expected losses in other local investments,
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    minimizing risk, expected losses in international financial markets, , family member
    opinions and gut feeling on the economy. The most influencing group was by order
    of importance accounting information, self-image/ firm-image coincidence, neutral
    information, advocate recommendation, and personal financial needs. Two factors
    had unexpectedly least influence on the behavior of the UAE investor behavior,
    namely the religious reasons and the factor of family member opinions.
    Acknowledgment
    I would like to thank University of Sharjah for the research grant.
    References:
    Bernstein,J.(1993). The Investors Quotient, John Wiley &Sons.
    De Bondt,W.F. and Richard,T.(1985). Does the stock market overreact?, Journal of
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