Investor Inclinations towards Capital Market: Recursive Analysis, Causes, and Factors

This study aimed to analyze and rank factors of investor inclinations towards the capital market through structural-interpretive modeling and recursive analysis.

The exploratory factor analysis was used with the grounded theory to extract indicators. Structural-interpretive modeling was then adopted to rank the factors and the recursive model was extracted through path analysis. Finally, the model fitness was evaluated in AMOS.

The exploratory factor analysis identified 46 categories in six dimensions, namely casual factors, contextual factors, axial factors, intervening factors, strategies, and outcomes. The structural-interpretive modeling results classified the factors in 5 levels from bottom-top, where the first and last levels were respectively causal factors and outcomes. The path analysis results mainly emphasized the indirect effects of contextual and intervening variables, and the findings suggested that the model had adequate fitness.

The results were analyzed for structural-interpretive modeling and recursive analysis of investor inclinations towards the capital market. According to the factor analysis results, the indices had high factor loads with six major components (factors). The discovered indicators shown in Table 1 suggest that the structural model of investor inclinations towards the stock market can be described with six components and 46 subcomponents. The causal factors, contextual factors, intervening factors, axial factors, strategic factors, and outcomes respectively had 10, 14, 8, 2, 5, and 7 subcomponents.The results of analyzing the factor loads of indices toward the main research objective found high factor loads in an investor’s personality and attitude, emotional intelligence, preferences and interests, mental security, loss avoidance, experience, and business intelligence, and governmental macro planning and Maslow’s hierarchy of needs. These indicators were highly important.People are inclined toward different activities for various reasons, and the same goes for investments and trades in financial markets. For instance, an investor’s personality and attitude from the causal indices is among the most important factors in the psychology of capital markets. In other words, various mental processes and situations lead to different feelings and motivations, which can greatly affect the investor decisions. Another important indicator is an investor’s experience that can be analyzed in two aspects, the first being their experience with the profit or loss from previous trades that will become a positive or negative mental background for investors during trades, and the second aspect is gaining experience in making buy or sell calls over time. An investor’s mental security also has a high factor load in causal factors. Investors are constantly concerned about capital security in the stock market since it is perceived as a country’s economic thermometer. It is affected by domestic and foreign sociopolitical problems that are major sources of share price fluctuations. Hence, investors can somehow moderate the fear of share price fluctuations by improving their investment knowledge and becoming aware of increases and decreases in share prices. However, an investor’s loss avoidance is also effective. According to Maslow’s hierarchy of needs, investors should use their additional savings to invest in the stock market for higher levels of mental security.An investor’s emotional and business intelligence are the next indicators with high factor loads in contextual factors. These are considered moderating factors in the mass behavior of investors.An investor’s preferences and interests were identified as the axial category. With high factor loads, these indicators suggest that investors have different preferences. For instance, some prefer very low-risk investments resulting in conservative profits, whereas others are willing to take substantial risks for more profit. All of the aforementioned indicators affect this category. Moreover, governmental macro planning is an important indicator with a high factor load in strategic factors. In this regard, it is important to accurately analyze the macro environment and formulate appropriate scenarios to adopt the correct rather than cumbersome regulations in the strategic planning foundation for the capital market. The authorities and legislators active in capital markets should always take this into consideration.The results of the conceptual structural-interpretive model for the effectiveness of factors suggested that the causal factors had the greatest effects on other dimensions. Furthermore, among the six major research dimensions, outcomes were the most dependent on other dimensions. The path analysis and model fitness analysis were conducted in AMOS. Analysis of the recursive model indicates a variable’s effect on itself and that the contextual and intervening dimensions affected themselves directly. Analyzing the final model fitness indicators and all parsimonious indices, namely PRATIO, PCFIC, and PNFI, showed that the final model had adequate fitness.The stock market is a segment of a country’s economy whose growth will also boost the economy. Hence, it is necessary to better recognize the factors affecting investor behaviors in a bid to understand their mentality and external behaviors within a scientific framework. This will facilitate better identification of views, states, and behaviors of investors and help the stock market grow, hence the following recommendations:According to the results, the investable companies in the capital market are advised to always improve the quality of accounting information in reports.The investors in the capital market are advised to set their financial goals first. Realistic goals are the road map helping investors identify what to invest in, set their investment horizon, and what markets to operate in. Therefore, investors can have different goals based on the three risk factors, namely income, expectation of growth rate, and dividend payout. Investors are advised to strike a balance between security, income, and investment growth to make successful investments. Given the effects of their feelings on the share price, investors should be more careful about buying or selling shares during transient emotional news cycles.Capital market authorities and legislators are advised to support the market during political turmoil to reduce emotional market actions. Therefore, they should consider the importance of regulations on economic growth.