Investor Sentiments and Financial Decision Making in Pakistan

...

By contrast, the behavioral view argues that managers time their equity issues to take advantage of stock prices that are sometimes too high relative to fundamentals (e.g., Tim Loughran and Jay R. Ritter, 1995; Malcolm Baker and Jeffrey Wurgler, 2000).

When prices are high and investors are optimistic firms might want to issue more equity and when prices are low investors are pessimistic than firm more rely on debt and less equity issue because there is rational change in market prices. Behavioral view is that managers time their equity issues to take advantage of stock prices.

DIVIDEND Decisions:

Bhattacharya (1979), John and Williams (1985) and Miller and Rock (1985) developed the signalling theory classic models, showing that, in a world of asymmetric information, better informed insiders use the dividend policy as a costly signal to convey their firm’s future prospect to less-informed outsiders. So, a dividend increase signals an improvement on firm’s performance, while a decrease suggests a worsening of its future profitability. Consequently, a dividend increase (decrease) should be followed by an improvement (reduction) in a firm’s profitability, earnings and growth. Moreover, there should be a positive relationship between dividend changes and subsequent share price reaction. There has been a significant number of empirical tests showing that dividend change announcements are positively related with share returns in the days surrounding the dividend change announcement. Pettit (1972, 1976) found evidence that dividend change announcements convey information to the market. market reaction to dividend change announcements is more sensitive to dividend increases when sentiment is increasing, for the UK market, and that the market reaction to dividend change announcements is less sensitive to dividend decreases when sentiment is increasing, for the French market. For the Portuguese market, we find no evidence of ISENT influencing the market reaction to dividend change announcements (Elisabete Simo˜es Vieira).

We allow for the fact that investor demand for dividend paying stocks is time-varying and the market pays a premium for such stocks when the demand is high. Moreover, when the dividend premium (DP) is high, dividend increases could be due to managers catering to high demand for dividends by investors. We find that when the DP is low, there is a significant positive relation between dividend increases and unexpected future earnings changes, consistent with the signaling theory of dividends (Ashiq Alia and Oktay Urcanb).

Research objective:

- First objective of our study is to find out the impact of investor sentiments on investors investment decisions in context of Pakistan.

- Second objective of our study is to measure the effects of investor sentiments on firms financing decisions in context of Pakistan.

- Third objective of our study is to describe the relationship between investor sentiment and dividend payout policy.

Research questions:

- Whether investor sentiments having any impact on investor investment decisions in context of Pakistan?

- How investor sentiments effect the firm financing policy in context of Pakistan?

- What is the relationship between investor sentiments dividend payout policy?

Methodology:

We conduct the research by using quantitative methods. We are using secondary data in our project which is collected from Pakistan stock exchange. We use the data of consumer confidence from 2012 to 2016 taken from state bank of Pakistan website ( www.sbp.org.pk) and we use this data in order to find out investor sentiment index. Using statistical software and formulas we calculate the results. For measuring variables we select firms randomly which are listed in Pakistan stock exchange and calculate their values by downloading annual reports of each from firm website.

Variables:

Our project contains one independent and three dependent variables. Investor sentiment is independent and investment, financing and dividend payout decisions are dependent variables. Investment is measure by using proxies of return on investment, return on asset and Earning/price ratio. Financing decisions measured by taking the measure of leverage ratio and debt to equity ratio. Dividend ratios measure by using proxies of dividend payout ratio and dividend yield. These proxies are calculated from firm annual reports values.

Model:

By using panel data in our project we calculate results. We are using the multiple regression equation in our study.

Yit=a + b1X1 + b2X2 + b3X3

Research Structure:

First chapter of our thesis contains introduction of topic, second chapter consist on literature review, third chapter explains the methodology and data, fourth chapter represent the results and fifth chapter describe conclusion and findings from thesis.

REFERENCES:

1)Elisabete Simões Vieira, (2011),"Investor sentiment and the market reaction to dividend news: European

evidence", Managerial Finance, Vol. 37 Iss 12 pp. 1213 – 1245 http://dx.doi.org/10.1108/03074351111175100

2) Jun Xie & Chunpeng Yang (2015) Investor sentiment and the financial

crisis: a sentiment-based portfolio theory perspective, Applied Economics, 47:7, 700-709, DOI:

10.1080/00036846.2014.978078

http://dx.doi.org/10.1080/00036846.2014.978078

3) Zhao-Hui Zhu, Zheng-Cheng Zhao & Han-Tao Bao (2016) The catering of controlling shareholders, investor sentiment and corporate investment efficiency, Journal of Discrete Mathematical Sciences and Cryptography, 19:3, 549-568, DOI: 10.1080/09720529.2016.1178906

http://dx.doi.org/10.1080/09720529.2016.1178906

4) Jen-Sin Lee , Pi-Hsia Yen & Kam C. Chan (2014) Investor Sentiment and Investment Behavior in the Chinese Mutual Fund Market, The Chinese Economy, 47:1, 38-52

http://dx.doi.org/10.2753/CES1097-1475470102

5)