Chapter II

REVIEW OF LITERATURE

There are large numbers of literature available on investment habits of

people in different parts of the world. Some of these are related to the

investments in physical assets, while some others are related to investment in

financial assets. Most of the research works conducted in the investment habits

of people in financial assets are overseas studies based on secondary data.

Indian studies on equity culture are very few in numbers.

Individual investors can plan those investments to suit both required

return and the degree of risk they are willing to assume. No investment

programme can properly be worked out, nor can the investor take any decision,

unless he has familiarized himself with the various investment alternatives.

The existing “equity culture” studies are very few and very little

information is available about investor perceptions, preferences, attitudes and

behaviour especially in the context of Kerala. All efforts so far in this direction

are fragmented. Most of the available studies in this area are reviewed and

presented in the following pages under nine broad heads.

1. Financial sector and economic development

Historical evidence of relationship between financial system and

economic growth can be traced to observations by Gurley and Shaw (1955,

1968)1 and Goldsmith (1969) which indicate that self financed capital

28

investment, as economies develop, first given way to bank intermediated debt

finance and later to emergence of equity markets as an additional instrument

for raising external finance.

According to Hicks (1969)2, new technological inventions did not set off

the Industrial Revolution in England in the 18th century. Rather more liquid

financial markets made it possible to develop projects that required large

capital injections for long periods before the projects ultimately yielded results.

The Industrial Revolution, therefore had to wait for the financial revolution.

Greenwood and Smith (1996)3 showed that large stock markets can

lower the cost of mobilizing savings and thereby facilitate investment in most

productive techniques.

Demirigue Kunt and Levine (1996)4 found that in the long term, stock

return volatility is lower in countries with more open capital markets. They

concluded that as countries grow and reach middle income (about $2000 per

capita in1990), the level of stock market development is positively correlated

with the development of financial intermediaries.

Demitriade and Hussein (1996)5 found little to support the view that

finance is a leading sector in the process of economic development. However

they have found evidence that in quite a few countries, economic growth

systematically causes financial development.

Levine and Sara Zervos (1996)6 assessed the strength of the empirical

relationship among each liquidity measure and the three growth indicators

economic growth, capital accumulation, and productivity. Their results are

29

consistent with view that the liquidity services provided by stock market are

independently important for long term growth.

According to Levine (1997)7, the financial system influences real sector

activities through its functional ability. A need for reduction in information and

transaction costs leads to the development of financial markets and

intermediaries. Financial markets through their services influences the rates of

capital accumulation and technological innovations which are prerequisite for

economic growth.

Singh (1997)8 concentrated his research on the stock exchanges of

developing countries between 1982 and 1992 and found that total market

capitalization of companies quoted on stock exchanges increased by a factor of

20, thereby highlighting the importance of the issue of financing through stock

markets.

Some researchers have found evidence contrary to the above. A cross

country study by Mayer (1990)9 covering the period 1970-85 concluded that

internal savers finance bulk of corporate investment in major developed

countries like the US, UK, Germany, Japan, Italy, Canada and Finland that the

role of the stock market is very limited.

2. Financial liberalization

Stiglitz (1994)10 criticized the financial liberalization thesis on the

grounds that financial markets are prone to market failures.

Nagraj (1996)11 compiled some useful direct evidence for India for the

period 1950-91. He concluded that capital market growth has changed financial

30

composition from bank deposits to shares and debentures, without favourable

influencing domestic savings rates or its financial assets. Equity capital’s share

in total market capitalization has declined since a bulk of such mobilization is

in the form of debt.

Singh (1997)12 while examining the implications of the rapid growth of

market capitalization in developing countries between 1982 and 1992,

concluded that financial liberalization, by making the financial system more

fragile, is not likely to enhance long term growth in developing countries.

Levine et al (2000)13, on exploring the relationship between financial

structure and economic development, find that financial structure does not help

in understanding economic growth, industrial performance, or firm expansion.

Instead overwhelming evidence that, legal and accounting reforms that

strengthen creditors rights, contract enforcements, and accounting practices

boost financial intermediary development and thereby, economic growth.

The investor who chooses from a large number of companies to invest in

shares is, in general more interested in returns in the form of dividends, bonus,

shares, right shares and appreciation of market value of the shares. The relative

significance of dividend per share, earnings per share, growth etc. on the equity

shares influences the investment decision of the persons.

3. Investment culture

In India, one of the earliest attempts was made by NCAER14 in 1964

when a survey of households was undertaken to understand the attitude towards

and motivation for saving of individuals. Another NCAER study in 1996

31

analysed the structure of the capital market and presented the views and

attitudes of individual shareholders. SEBI-NCEAR Survey (2000)15 was

carried out to estimate the number of households and the population of

individual investors their economic and demographic profile, portfolio size,

investment preference for equity as well as other savings instruments. Some of

the relevant findings of the study are: 1) bank deposits has an appeal across all

income class; 2) 43% of the non-investor household equivalent to around 60

million households (estimated) apparently lack awareness about stock markets;

and 3) compared with low income groups, the higher income groups have

higher share of investments in corporate securities. The study predicted that the

investment of households in corporate securities will likely to increase.

Gupta (1994)16 made a household investor survey with the objective to

provide data on the investor preference on financial assets.

Shanmugham (2000)17 conducted a survey of 201 individual investors to

study the information. Sourcing by investors, their perceptions of various

investments strategy dimensions and factors motivating share investment

decisions and reports that among various factors, psychological and social

factors dominated the economic factors in share investment decisions.

4. New issue market

There is a paucity of research done in the new issue markets in India.

What is worse is that much of whatever little work has done, dates back to the

late 1970’s and early 1980’s prior to the qualitative transformation, that took

place in the Indian equity markets in the 1980’s. The advent of free pricing in

32

1992 has changed the dynamics of the new issue market almost beyond

recognition.

From an academic point of view, the most significant work in the field

of new issues in India is that of Gujarathi (1981)18 who examined the question

of risk adjusted return in the new issues market. His conclusion is that investors

in the new issues market in 1970’s earned an extra normal return of nearly

2½% per month.

Khan (1977, 1978)19 studied the role of new issues in financing the

private corporate sector during the 1960’s and early 1970’s and concluded that

the new issues were declining in importance. He also showed that with

underwriting becoming almost universal, institutions like LIC and UTI were

becoming major players.

Jain (1979)20 shed more light on this question with an analysis of UTI’s

role in the new issue market. He argued that UTI looked at underwriting as a

method of acquiring securities at low cost rather than an arrangement of

guaranteeing the success of new issues. In the context of rapidly changing

structure of the merchant banking industry in India today, a deeper analysis of

the motivations and strengths of different players would be highly useful.

Chandra (1989)21 and Varma and Venkiteswaran (1990)22 critically

examine the CCI guidelines for valuation of shares and point out that CCI is

methodology is fundamentally flawed. With the abolition of the office of the

CCI, the issue pricing using the CCI methodology has however become

redundant.

33

Anshuman and Chandra (1991)23 examine the government policy of

favouring the small shareholders in allotment of shares. They argue that such a

policy suffers from several lacunae such as higher issues and servicing costs

and lesser vigilance about the functioning of companies because of inadequate

knowledge. They suggest that there is a need to eliminate this bias as that

would lead to a better functioning capital market and would strengthen investor

protection. With proportional allocation being advocated by SEBI, a shift in the

policy is already evident. However, there appears to be some rethinking on

proportional allocation after the recent experiences which clearly demonstrate

that such a policy could result in highly skewed ownership patterns.

One of the early work on functioning of stock markets and financial

institutions was by Sinha, Hemalatha and Balakrishnan (1979)24. Bhole

(1982)25 wrote a comprehensive book on the growth and changes in the

structure of Indian capital markets and financial institutions. Several books

have been written on security analysis and investment in Indian stock markets

based on empirical research; Bhalla (1983)26; Jain (1983)27; Sahni (1986)28;

Singh (1986)29; Chandra (1990)30; Regunathan (1991)31; Avadhani (1992)32;

Yasaswy (1985, 91, 92)33 and Barua et al (1992)34. These books are primarily

written for initiating lay investors to techniques for security analysis and

management of investment portfolios. Basu and Dalal (1993)35, Barua and

Varma (1993)36 and Ramachandran (1993)37 have critically examined the

various facets of the great securities scan of 1992. Several studies for example

Sahni (1985)38, Kothari (1986)39, Lal (1990)40, Chandra (1990)41, Francis

(1991)42, Ramesh Gupta (1991, 92)43, Reghunathan (1991)44, Varma (1992)45,

L.C.Gupta (1992)46 and Sinha (1993)47 comment upon the Indian capital

34

market in general and trading systems in stock exchanges in particular and

suggest that the systems therein are rather antiquated and inefficient and suffer

from major weaknesses and malpractices. According to most of these studies,

significant reforms are required if the stock exchanges are to be geared up to

the envisaged growth in the Indian capital market.

5. Investment decision

The investment decision making process of individuals has been

explored through experiments by Barua and Sreenivasan (1987, 1991)48. They

conclude that the risk perception of individuals is significantly influenced by

the skewness of the return distribution. This implies that while taking

investment decisions investors were concerned about the possibility of

maximum losses in addition to the variability of returns.

Gupta (1981)49 argues that designing a portfolio for a client is much

more than merely picking up securities for investment. The portfolio manager

needs to understand the psyche of his client while designing his portfolio.

According to Gupta, investors in India regard equity shares, debentures and

company deposits as being in more or less the same risk category and consider

mutual funds, including all equity funds, almost as safe as bank deposits.

Chandra (1989)50 discusses the mistakes made by individual investors in

designing their portfolios and suggests suitable remedial measures.

Mayya (1977)51, Barua and Reghunathan (1992)52 and Prabhakar

(1989)53 examined empirically the hedge provided by stocks and bullion

35

against inflation. These studies found that while gold provided complete hedge

against inflation, silver and stock were only partial hedges against inflation.

Rao and Bhole (1990)54 arrive at similar conclusion about stocks. The

issue of inflation hedge has also been researched in the context of stocks

compares the BSE National Index (Natex) which comprises 100 scrips with

concludes that the Natex is a sluggish index which responds too slowly to

market conditions. Changes which are reflected in sensex on any day are

completely reflected in the Natex only by the next day. He finds that sensex is

more volatile than Natex. He concludes for this and other reasons that those

who follow the Natex because of its greater comprehensiveness and theoretical

appeal may be mistaken. The Sensex needs to be taken more seriously a sound

market index.

As to whether SEBI has been successful in improving the functioning of

Indian stock markets, the conclusions are mixed. Francis (1991)55, Barua

(1993)56, Dhillon (1993)57 in doctoral dissertation studies the regulatory

policies of Bombay Stock Exchange (BSE) over a four year period (July 1986-

June 1990) has been examined. The findings show that regulatory authorities

decide changes in their margin policy on the basis of market activity. The study

reveals that the margins are prompted by changes in settlement returns, price

volatility, trading volume and open positions.

Pandya (1992)58 observes that as a regulatory and development body,

SEBI’s efforts in the direction of investor protection are varied and unlimited.

The measures brought in by SEBI broadly cover measures for allocative

efficiency in the primary market with fair degree of transparency, reforms in

36

the secondary market for visible and mutual funds, regulation of various market

intermediaries and above all for the protection of the investing public.

Venkateswar (1991)59 explores the relationships of the Indian stock

markets as reflected by the BSE index vis-à-vis other prominent international

stock markets. 23 international stock indices are used over the period 1983-

1987. He concludes that there is practically no meaningful relationship

between the BSE index and other international stock market indices though the

British and South Korean indices are inversely related to BSE.

Reghunathan and Varma (1992)60 point out that any comparison of the

Indian stock market with those elsewhere must be carried out on a common

currency base. They find that in dollar terms, the SENSEX return over 1960-92

period is only about 0.5% while during the same period the returns in the US

and the Japanese are 6.1% and 11.4% per year respectively.

6. Merchant banks and capital market

There are several works in the field of merchant banking related to the

capital markets. Dhankar (1986)61 deals with procedural aspects of merchant

banking. Verma (1990)62 deals with organisation and management of merchant

banking function.

According to Bhatt (1980)63 the most important merchant banking

functions are promotion, financing and syndication of loans for projects in the

country including foreign collaborations, investment advisory services,

investment management and advise on joint ventures abroad. Such merchant

37

banking institutions can also assist non resident Indians in investing their funds

in shares of new companies in India, bonds, securities, etc.

Saha (1988)64 argues that the strategy of merchant bankers should not be

to develop an instrument for raising capital from the instrument for raising

capital from the market but to develop a process that makes creation and

delivery of the instruments possible in accordance with the pace and

requirements of the issuers.

McKinnon and Shaw (1973)65 laid the theoretical grounds for the

relationship between financial development and economic growth. According

to them government restrictions on the banking system (such as interest rate

ceilings, high reserve requirements, and directed credit programmes – defined

as financial repression) impede the process of financial development and

consequently reduce economic growth. Hence they advocated liberalizations of

financial markets and it was their work which encouraged financial

liberalization in developing countries as part of economic reforms.

The above views were further extended by Cho (1986)66 who argued

that financial market liberalization may remain incomplete without an efficient

market for equity capital as a means of spreading risk.

Kumar and Tseteko (1992)67 argued that substitutability and

complementarity between banks and securities market appear to be sensitive to

the level of economic growth. According to them, an economic environment

with a flourishing private sector and well established banking system is

conducive to growth and expansion of equity market.

38

A study by Atje and Jovanivic (1993)68 concluded that stock markets on

their own can raise a typical developing country’s economic growth by an

outstanding 2.5 per cent per annum.

King and Levino (1993)69 used several measures for the level of

development of financial intermediaries for a cross section of 77 countries for

the period 1960-1989. They found a statistically and economically significant

relationship between the measures of financial development and growth

variables.

Levine and Zervos (1995)70 explored the effects of liberalization of

capital control. They indicated that countries which liberalized restriction on

capital and dividend flows showed a marked improvement in the functioning of

their stock exchanges.

Agrawal (1980)71 stresses the need to redefine the underwriting function

of merchant bankers. He underscores the need for distinguishing underwriting

from investing. In his opinion such a destination does not exist in India.

Trikha (1989)72 highlights the lack of professionalism of merchant

bankers in India as regards their attitude towards the investing public. The

concern has become even more relevant today.

Jain (1979)73 shed more light on the role of merchant bankers with an

analysis of UTI’s role and argued that the merchant bankers looked at

underwriting as a method of acquiring securities at low cost rather than an

arrangement for guaranteeing the success of new issues. In the context of

39

rapidly changing structure of capital markets in India, a deeper analysis of the

motivations and strengths of different players would be highly useful.

With the opening up of the Indian economy merchant banking is one

activity which would become crucial for sustained economic development.

Therefore concerted research is required in this area.

7. Determinants of share prize

Durand (1957)74 examined the impact of some variables viz. DPS, EPS

and book value per share to determine the price per share and find that the

effect of dividend pay out on stock prices influence the share prices.

Miller and Modigliani (1958)75 studied the impact of leverage and

earning yield on common stock. The study revealed that leverage displayed a

significant positive influence on the stork yield.

Gordon (1960)76 used the averages of dividend per share, earnings per

share, book value per share and growth as explanatory variables to study the

impact on (1) market price per share and (2) the price per share to book value

per share. The dividend per share emerged as highly significant explanatory

variable.

Srinivasan (1988)77 examined the role of liquidity considerations in the

pricing of capital assets with specific focus on the relation between stock

returns and their bid-ask spreads. The research demonstrates that the spreads

are an important determinant of stock returns and the investment decisions

should depend not only upon risk inherent in the security but also on liquidity.

40

Dixit (1986)78 examined the impact of dividend per share, retained

earning per share, and learning per share on the market price per share.

Dividend per share emerged as the most significant variable which influenced

the share price in the positive direction. Earnings per share and retained

earnings per share revealed a weak influence on the share price.

Srivastava (1966)79 in his empirical work tested the influence of

dividend per share and retained earning son the share price of joint stock

companies in India. Dividend per share turned out to be the most significant

variable while retained earnings had no significant influence on share price in

India.

Ojha (1973)80 analysed the impact of earning per share, retained

earnings and dividend per share on share price. Dividend was observed to be

the most powerful variable influencing the share prices as its effect was almost

two times higher than that of retained earnings.

Chandra (1977)81 explained the variations in share prices with the help

of five explanatory variables i.e., size, growth, risk and leverage and the study

revealed that dividend per share and size variables have significant influence

on the market price of share. Risk and leverage had no influence on share price.

Balakrishnan (1984)82 analysed the interrelationship in the explanatory

variable and found that book value per share and dividend per share turned out

to be the most significant determinants of the market price of different

industries. Yield also emerged as a significant determinant on share price.

41

Dixit’s (1986)83 study on share price and investment to identify the

internal factors that affects the fluctuations in prices of selected equity shares

on the basis of individual company analysis, industrial group analysis and

overall analysis also revealed that dividend and earnings turned out to be the

most predictive variables.

Kumar (1986)84 study showed the sensitiveness of market towards the

dividend policy of the firms.

Pandey (1981)85 examines the impact of leverage on equity prices and

concludes that Modigliani-Miller hypothesis is not supported. However, the

risk proxy used in the paper, namely, coefficient of variation of net operating

income, is highly questionable.

Zahir and Yakesh (1982)86 find the dividend per share to be the most

important variable affecting the share price followed by dividend yield, book

value per share, dividends coverage and the return on investment, in that order.

8. Role of development instruments and mutual funds

In developed economies, bond market tend to be bigger in size than

equity market. In India however, corporate bond market is quite small

compared to the size of the equity market. One of the main reasons for this is

that a large part of corporate debt, being loan from financial intermediaries, is

not scrutinized. The picture however is undergoing a sea change in the last few

years. An increasingly large number of companies are entering the capital

markets to raise funds directly from the market through issue of convertible and

non convertible debentures. The deregulation on interest rates in the new

42

liberalized environment is also resulting in innovative instruments being used

by companies to raise resources from the capital markets.

The book written by Sen and Chandrasekhar (1986)87 was a

compendium of rules, regulations and procedures for issue of debentures. The

articles by Atmaramani (1984)88 and Premachander (1989)89 deal with changes

needed in guidelines governing issues of debentures to ensure that the

instrument becomes popular with investors.

The work done by Kapadia (1981)90, Kapoor (1981)91, Sinha (1983)92,

Chaudhury (1985)93 analyze the usefulness of convertible debentures as an

instrument for raising resources from the capital markets. After stating that

convertible debentures have provided attractive returns to investors, Chaudhury

identifies, lack of liquidity and Sinha identifies capital gains tax as two

dampeners to convertible debentures finding favour with investors.

Barua and Srinivasan (1987)94 Barua and Reghunathan (1990)95 examine

the term son which convertible debentures are issued to investors. They argue

that the extremely low conversion price was unfair to the existing shareholders

of the company as it implied a forced transfer of wealth to new shareholders.

Barua and Regunathan focus attention on the compulsory conversion of

convertible debentures into shares and argue that conversion ought to be

optional so that convertible debentures would acquire the features of a call

option.

Barua, Madhavan and Varma (1991)96 examine the case of convertible

debentures with unspecified conversion terms and concluded that while under

normal circumstances one would expect the share prices to govern the prices of

43

convertible debentures if conversion terms are not specified changes in the

expectation about the conversion terms could start affecting the share prices

through the dilution effect.

Barua et al (1994)97 undertake a comprehensive assessment of the

private corporate debt market, the public sector bond market, the government

securities market, the housing finance and other debt markets in India. The

study highlights the need to integrate the regulated debt market with the free

debt market, the necessity for market making for financing and hedging options

and interest rate derivatives and tax reforms.

Mutual funds play an important role in mobilizing the savings of small

investors and channelising the same for productive ventures in Indian

economy. SEBI-NCAER Survey (2000)98 revealed that higher income groups

have higher share of investments in Mutual funds signifying that mutual funds

have still not become truly the investment vehicle for small investors.

Madhusudhanan V Jambodekar (1996)99 conducted a study to assess the

awareness of MF’s among investors, to identify the information sources

influencing the buying decisions and the factors influencing the choice of a

particular fund. The study reveals among other things that income schemes and

open ended schemes are preferred than Growth schemes and close ended

schemes during the then prevalent market conditions. Newspapers and

magazines are the first source of information through which investors get to

know about MFs/schemes and investor service is a major differentiating factor

in the selection of mutual fund scheme.

44

Sujit Sikidar and Amrit Pal Singh (1996)100 carried out a survey with an

objective to understand the behavioural aspects of the investors of the North

Eastern region towards equity and mutual funds investment portfolio. The

survey revealed that the salaried and self employed formed the major investors

in mutual funds due to tax concessions.

Syama Sunder (1998)101 conducted a survey to get an insight into the

mutual fund operations of private institutions and revealed that awareness

about mutual fund concept was poor during that time in small cities like

Visakhapatnam.

Ippolito (1992)102 says that fund selection by investors based on past

performance of the funds and money flows into winning funds more rapidly

than they flow out of losing funds.

Goetzman (1997)103 states that there is evidence that investor

psychology affects fund/scheme selection and switching.

DeBondt and Thaler (1985)104 while investigating the possible

psychological basis for investor behaviour argue that mean reversion in stock

prices is an evidence of investor over reaction where investors overemphasize

recent firm performance in forming future expectations.

Since 1986 a number of articles have been published explaining the

varied aspects like regulation of mutual funds, investor expectations, investor

protection, performance and functioning etc. A few among them are

Vidyasankar (1990)105, Sarkar (1991)106, Agarwal (1992)107, Sadhak (1991)108,

Sharma C Lall (1991)109, Samir K Barua et al (1991)110, Sandeep Bamzai

45

(2001)111, Atmaramani (1995, 1996)112, Subramanyam (1999)113, Krishnan

(1999)114, Ajay Srinivasan (1999)115, Rajarajan (1997)116, etc. It can be inferred

that mutual fund as an investment vehicle is capturing the attention of the

various segments of the society leading to the development of equity culture in

the country.

9. Investment behaviour

Bensman, Miriam (1997)117 says that markets do not just trade on

available news and rational response but reflect investors' irrational impulses.

That irrationality, they believe, explains such market anomalies as the out

performance of value and momentum stocks over the broad market or the now-

famous January effect. Furthermore, behavioral theorists argue that

understanding the emotions and cognitive errors that influence investors'

decision making is key to establishing which anomalies are consistent enough

to profit from.

Zvi Bodie et al (1997)118 from a unique survey containing information

on the composition of the respondents’ total asset holdings — both inside and

outside their retirement accounts — shed light on individual asset-allocation

behavior. Individual asset allocations are consistent with the recommendations

of expert practitioners and with the prescriptions of economic theory.

Bolster et al (1995)119 develop a useful model for characterizing

investors in terms of the suitability of particular investments. This model makes

the process of choosing securities less subjective without forfeiting the broker’s

ability to tailor portfolios to the needs of clients.

46

Behavioral finance, a study of the markets that makes use of

psychology, is throwing more light on why people buy or sell specific stocks or

do not buy stocks at all. Burr, Barry (1997)120 analysed the tendencies of

investors to make mistaken analyses or have biases are at the core of behavioral

finance.

The study of McInish, Thomas (1991)121 using data for more than 500

investors, shows that propensity to seek novelty and avoid ill defined and risky

situations differs between investors who currently either own or do not own

each of a wide variety of types of assets.

Nagy, Robert A et al (1994)122 studied relationships between economic

and behavioral and demographic variables. The study reveal that individual

equity investors with substantial holdings in Fortune 500 firms reveal that

individuals base their stock purchase decisions on classical wealth-

maximization criteria combined with diverse other variables. They do not tend

to rely on a single integrated approach.

Neumark, David et al (1991)123 suggests that the asymmetry and

temporal variations in cross-market correlations are consistent with rational

investor behavior in equity markets with nonzero transaction costs and time-

varying share price volatility.

Experts’ earnings predictions exhibit positive bias and disappointing

accuracy. These shortcomings are usually attributed to some combination of

incomplete knowledge, incompetence, and/or misrepresentation. Olsen, Robert

A. (1996)124 suggests that the human desire for consensus leads to herding

behavior among earning forecasters. Herding results in a reduction in the

47

dispersion and an increase in the mean of the distribution of expert forecasts,

creating positive bias and inaccuracy in published earnings estimates. Investors

mistake reduced dispersion for reduced risk and positive bias for high future

returns.

Rosen, Barry N (1991)125 An important dimension of the ongoing trend

toward greater corporate social responsibility is the emergence of individual

and institutional investors who invest in companies that support social

objectives. The study finds that compared with other investors, socially

responsible investors are younger and better educated. Although the

respondent’s value socially responsible behavior in companies they invest in,

they are unwilling to sacrifice financial returns to achieve it.

Schijndel, et al (1987)126 made an attempt to justify that the investor will

move into the shares and corresponding production capacity level of those

firms for which the investors’ rate of return is maximized. As a result, each

investor’s portfolio consists of the shares of firms with capital sizes contained

within a narrow range of levels.

Shaw, Leslie (1995)127 studied the common reactions to the principal-

agent relationship inherent in the investment industry structure and suggests

that sponsors and managers should be the joint problem solvers making

decisions for their joint benefit.

Fashions and fads can be found in stock prices far more than what is

suggested by the correlation between stock prices and dividends. Shiller,

Robert J (1990)128 argues that the observed volatility of speculative prices and

48

the pattern of feedback of price to dividends/ earnings is indicative of simple

feedback models of investor behavior.

Mackenzie, Craig (1997)129 has made a number of claims about the

peculiar motives people have for their economic behavior and claims that the

behavior of investors is based on ‘endowment effect’ and ‘loss aversion.

Abarbanell (1992)130 examined whether security analysts overreact or

under react to prior earnings information and whether any such behavior could

explain previously documented anomalous stock price movements and viewed

as overreactions to earnings are not clearly linked to stock price overreactions.

Barry, Christopher B et al (1998)131 studied on capital markets in

developing countries which become an important asset class and found out that

these emerging markets are commonly associated with high returns, high

volatility, and diversification benefits for investors in developing market. They

have experienced a high level of volatility, but they also have consistently

provided diversification benefits when combined with developed market

portfolios.

Chan, Louis K. C et al (1996)132 examined whether the predictability of

future returns from past returns is due to the market’s under reaction to

information. The results suggest a market that responds only gradually to new

information.

Choudhry, Taufiq. (1987)133 studied volatility, risk premium, and the

persistence of volatility in six emerging stock markets before and after the 1987

stock market crash. Results indicate changes in the ARCH parameter, risk

49

premium, and persistence of volatility before and after the 1987 crash. But

these noted changes are not uniform and depend upon the individual markets.

Factors other than the 1987 crash may also be responsible for the changes.

David, Alexander. (1997)134 studied the average relative profitability of

different firms in the economy jumps erratically. And suggested that investors

continuously update their beliefs regarding high and low productivity firms by

observing the total return on each firm, which consists of the average

productivity plus noise.

Narasimhan Jegadeesh (1993)135 argued that strategies of buying stocks

that have done well in the past and selling those that have done poorly generate

significant positive returns over 3-12-month holding periods. There is a similar

pattern of returns around earnings announcements of past winners and losers.

Arvind K Jain (1997)136 in his study focuses on 36 professional South

Asian (Indian) families in a metropolitan city in Canada in order to understand

motives for financial behavior. In accordance with the Hindu worldview,

Indians view wealth acquisition as necessary for the natural progression of an

individual’s life and take a long view of time when it comes to investment

decisions. Their primary purpose is to invest money in order to provide for

their children’s education. Their cultural roots allow them to take a long-term

view and make them more risk tolerant. Although these families take economic

criteria into account, such criteria alone do not fully explain their consumption,

saving, and investment patterns. It would appear that their need for saving

determines their consumption not the other way around. To understand their

financial behavior, one has to identify the cultural worlds in which Indians live.

50

The study highlights the importance of understanding the socio-cultural context

of decisions that may appear to be purely economic decisions at first sight.

Reviews of available literature about capital market and investors

preference reveal that there is a positive relationship between the development

of capital market and investors attitude. The studies so far conducted were not

towards the assessment of equity culture. The present study makes and in-

depth analysis of equity culture by analysing different contributing variables

responsible for fostering equity culture in Kerala. The study spot lights the

variables like age, education and occupation for the over all development of

equity culture.

51

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