Determinants of individual investors investment decision in Pakistan stock exchange

Abstract

Financial wellbeing of individual investor is driven by sound investment decision making ability. This study investigates the determinants influencing investment decision making behaviour among individual equity investors. Primarily, the study investigated the direct impact of financial literacy, behavioural and environmental factors on investment decision making behaviour and financial risk tolerance. The study further highlighted the mediating effect of financial risk tolerance in the relationship between financial literacy, behavioural factors, environmental factors and investment decision making behaviour among individual equity investors. Finally, the study explored the moderating impact of financial experience in the relationship between financial literacy and financial risk tolerance. Using quantitative research design and multi-stage random, and convenience sampling, a survey questionnaire collected data from 382 registered individual investors of Pakistan Stock Exchange. The measurement model was tested by using Exploratory Factor Analysis (EFA) and Confirmatory Factor Analysis (CFA) techniques. Structural model tested the relationships between the constructs and revealed a positive and significant impact of financial literacy, behavioural and environmental factors on investment decision making behaviour and financial risk tolerance among individual equity investors. Similarly, financial risk tolerance mediated the relationship between the determinants such as financial literacy, behavioural factors, environmental factors, and investment decision making behaviour. Moreover, the research discovered slightly increased but insignificant contribution of financial experience as moderator between the relationship of financial literacy and financial risk tolerance. Hence, this study adds empirically by discovering mediating role of financial risk tolerance between the constructs of the model. This study suggests different measures to policymakers for improving financial literacy among individual investors. It also proposes significant functional insights for stockbrokers, investment advisors, and financial managers through examining the investment decision making behaviour of individual equity investors.