Inve Nature of Investment

10

CHAPTER II THEORETICAL BACKGROUND AND PREVIOUS RESEARCH

2.1 Theoretical Background 2.1.1 Investor According to Liaw 2004 investors clients can be distinguish between investment management for individual investors and institutional investors. According to Investopedia, definition of Individual investor is investors who buy and sell securities for their personal account, and not for another company or organization http:www.investopedia.com. Investopedia define institutional investor as a non-bank person or organization that trades securities in large enough share quantities that they qualify for preferential treatment and lower commissions. http:www.investopedia.com. McMillan et al. 2011 explain that Individual investors’ short term goals planning are such as providing children’s education, saving for major purchase or starting business and also to get income in the retirement period.

2.1.2 Nature of Investment

Jones, Charles P. 2009 define that an investment is the commitment of funds to one or more assets that will be hold over some future period. It is concerned with the management of investor’s wealth. Rose, Peter S. and Marquis, Milton H. 2008 explains that investment generally refers to the acquisition of capital goods such as buildings and equipment, and the purchase

2.1 Theoretical Ba a

ck ckground

2.1.1 Inve

e st stor A According to o L Lia iaw w 2004 investors cli li en nts ts c c a an be distingu u is i h between in n v vestment nt m m an an ag emen en t t fo r individual inv esto rs rs and i i ns n ti ti tu tu ti ti onal inv nvestors. Acco rd rdin in g g t to Inv nv es to pe dia, definition of Individual in ve st or r is inve e st st or or s s who bu b y an n d d se l ll sec ec ur ities for th ei r personal a ccount, an d not for an ot other co comp mp any o or or or ga ga ni za a t tion http:www.i nv es tope di a. com. In ve stopedia defin e e in nst stit it ut ut io i nal l investo or as a non- ba nk perso n or org aniz at ion that tra de s securi t ties in larg rge e enoug gh share quantities th at t hey qualify fo r pr eferential treatme nt t and l l o owe er comm mi is si ons. ht tp p : w w ww ww i .i nv nv es es topedia.com m. Mc Mc Mi Mi ll ll an an et a l. 2 01 1 e e x xplain t t ha ha t t Individual investors’ short term go o al als pl pl anning are such as providing childr dren en ’ ’s ed educ uc at at io io n, saving for major purchase or starting business and also to ge ge t t in inco come me in th th e e re r tireme t nt per io io d. d.

2.1.2 Nature of Investment

Jones, Charles P. 2009 de d fine tha at an investment is the commitment of funds to one or more assets that t will l be hold over some future period. It is concerned with the management of o investor’s wealth Rose Peter S and 11 of inventories of raw materials and goods to sell. The form of investment for business firm, government, and house hold is different. In business firm, expenditures on capital goods and inventories are including as investment expenditures. For government, the spending to build and maintain public facilities is the form of investment. And in the household the form of investment is such as purchase a house. Investments often require huge of funds, especially business firm as the leading investment sector in the economy, but it can increase the productivity of labor and leads to higher standard of living. The huge funds can be raised quickly by selling financial claims in the financial markets. Financial claims promise investors to get a future flow of income the form of dividends, interest, and other return. Investor will expect not only recover the original fund but also additional income as reward for waiting assuming risk, even there is no guarantee that the expected income will ever materialize. According to Damodaran, Aswath 2012 there are three steps that investors consider in investment choices, such as: a Asset allocation, in these step investors will determine which asset classes to invest their funds in. this is the first and the most important step and will depend on investor preferences. b Asset selection: in asset classes that choose in the first step investors have to choose the specific asset to hold. expenditures on capital go go od ods and inve nt nt or or ies are including as investment expenditures. For r government, the spending to bu buil il d and maintain public facilities is s th the form of investme m nt n . An An d d in in the he household the f f or o m of investment is suc c h h as purchase e a a ho hous u e. Investments oft f en r r eq eq ui ui re re huge of fun ds ds , especially bu business f fir irm m as the e l lea di ng inves tm ent sect or r i i n n the ec ec on on o omy, but ut it can increa ea se se t t h he p p r rodu ct iv ity of labor a nd leads to hi gh er s ta tandar d d of of l l iv iv ing. T T he hu hu ge fund ds can be rais ed quickly by selling fi na ncial clai ms s in th th e e f financia al ma ma rk et t s s. Financial claims pr omise inve stors to g et a future flow o o f in nco come me the form of divide nd s, i nterest, and o th er ret urn. Inves to r will exp e ect not on n ly ly recov ve r the original fun d bu t also add it io nal income as reward for w w ai aiting g assu um mi ng r is k, e ve e n n th th er er e e is is no guarantee th th at at t t he he e e xp xp ecte d in co me me will ev ev er er materialize. According to Damodaran, Aswath 2012 there are thre e e e step eps s t t h hat in inve v stors cons id ider r i i n n in in v vestment nt c cho hoic ices es , , s such as: a As As s set allocation, in in these ste tep investors wi i ll ll d d et e er mi ne ne w w hi ch asset classes to invest their fund ds in. this is the first and the most important step and d will depe end on investor preferences. b Asset selection: in n ass s e et classes that choose in the first step investors have to choose e the specific asset to hold 12 c Performance Evaluation: The judgment that investors made to choose investment will depend on how the investor measure risk and trade off to get higher return. According to Jones, Charles P 2009 the foundation for making investment decision are the tradeoff between expected return and risk, the investment decision process that practiced nowadays is the great unknown; all the investors have to deal with uncertainty that the realized return on any risky assets may be different from what was expected. Third is the global investment arena, where investors have to think investment in a global context and the last is importance of internet, where investors can access a wealth of information about investing, trade cheaply and quickly for their investment. According to Obamuyi, Tomola Marshal 2013 there are five principal factors that influencing investment decision, which are performance of the company’s stock, expected stock splitcapital increasesbonus, dividend policy, expected corporate earnings and get-rich-quick. That research also found that the socio-economic characteristics of investors age, gender, marital status and educational qualifications influence in the investor investment decision. According to Barber and Odean 2001 selecting common stocks that will outperform the market is a difficult task. According to Chandra, Abhijeet 2009 Individual investors take trading decisions based on their self-perceived competence that is influenced by several factors, such as: and trade off to to g get higher retu turn rn . According to Jones es , Charles P 2009 the foundation on for making investment ff decision are e the tradeoff betw tw ee ee n n ex ex pe pe ct ct ed d return and ri sk sk , , the investment decision on process tha t t pr pr ac ac t ticed nowadays is t h he g gre re at at u unknown; all t t he h investors ha a v ve to de e al al w wit ith h unce e rt rt ai ai nt y that the r ealized re tu u rn rn on an ny y ri ri sk sk y y assets m m ay be differen en t t fr fr om w w ha t wa s expected. Th ird is the glo ba l in ve vestment nt a are re na n , wh where in n ve ve st t ors ha ha ve to think in ve stment in a gl obal con te xt and the l as t t is imp mp or or tance o of in inte te r rnet, , wh ere investors ca n ac cess a w ealth of i nformation about i n nvesti ti ng ng , t trade cheapl y y an d quickly fo r their in ve stme nt . Ac co rd ing to O ba mu yi, To m mola Marsh h al a 2 013 there are five principa l fa ct ors that i nf luen ci ng investment de ci ision, w whic h h are pe pe rformance of of t t he he c c om o pany’s sto to ck ck, ex ex pe pe cted s to ck s s p plitcap p it it al al increasesbonus, dividend policy, ex xpe pect cte ed corporate earnings and get-rich-q -q ui u ck ck . Th That t r r es es earch also found that the socio-economic characteristics of in n ve vestor ors s a a g ge, ge gend nder, ma i ri t ta l l st at atus us a a nd nd educa ca ti tion onal al q q u ua l lificati i on on s s i i nf nf l luence i in the e in in v vestor invest st me me nt dec c is is io ion. According t t o o Barber er and Odean 20 2001 01 se le ct ct in ing common stocks that will outperform the m market is a d difficult task. According to Chandra, Ab Abhijeet 2 2009 Individual investors take trading decisions based on their self-percei ive v d c competence that is influenced by several factors such as: 13 1. Income Chandra, Abhijeet 2009 explain that Individual with higher income found to be more confidence than individual with lower income. It is prove that investor with higher income is more confidence to make a judgment in investment. This research found that significant income level leads investors to be more confident and they are more willing to act on their own judgments in term of investment in stock market. 2. Gender As stated on Barber and Odean 2001 that Psychological research has established that men are more overconfidence than women, especially male- dominated in finance sector. The result of the research are supported the financial model that men are more confidence than women. Men trade worse than women and they reduce their return more so than women do. 3. Age Chandra, Abhijeet 2009 explain that investor trade less frequently as they grow older, they tend to play safe with their funds. The research also found that investors in the age group 25-35 years and 35-45 years are more competence and having more passion in high return. 4. Knowledge a. Education Background Chandra, Abhijeet 2009 explain that perception and knowledge of investors could make them become overconfidence. Higher level of education makes an investor feel competence and found to be more confidence e th than individua a l l wi w th lower income. It is prove that investor with high gh e er income is more confidence t t o o make a judgment in investment. Th This research found d th h at at sig g ni ni fi fi ca c nt nt income level le ead a s investors to be more c c o onfident and t t h hey y ar ar e more willing to act on n t he he ir ir own judgmen n ts t in term of in n v vestment nt i i n n st st oc o k ma a rk rk e et .

2. 2

Ge Ge nd n er As s s ta ted on Bar be r and Od ea n 2001 t ha t Psycholo gi gical re rese se ar ch ha as es esta ta b blish hed that men are m or e over co nfiden ce than women, e sp pecia a ll lly y ma m le- do mi na a te d in finan ce s ector. The r es ul t of t he r esearc h ar e supported th t e financ c ia ia l model l that men are more co nfid en ce than wo me n. Men trade worse t than wo wome n n and th th e ey reduce thei r r re re tu tu rn rn m m or or e so than wome me n n do do. 3. Age Chandra, Abhijeet 2009 explain that investor trade less fr fr eq eque ue n ntly ly as th th ey ey grow l ol d der, t he hey y te tend nd to pl l ay ay s s af af e e wi with th their f fun un ds ds . . Th The research a a ls lso o f found that i inv nves e tors in n th the age group 25 5 -3 - 5 year r s s and 35-45 year ars s ar ar e more re c competence and having more passion in high return. 4. Knowledge a. Education Backgroun nd Chandra Abhij ij eet 2009 explain that perception and 14 lead them to make frequent trading decision in financial market. Education status determines their understanding of financial product, offers, and opportunity that makes them to be more confidence in makes a financial decision. b. Information According to Merton, Robert C. 1987 based on asset pricing models, investors act on every type of publicly available information instantaneously as soon as it received. There are two information costs: 1 the cost of gathering and processing data and 2 the cost of transmitting information from one party to another source of information such as firm itself, stock market advisory services, brokerage houses, and professional portfolio managers . According to Lee et al. 2008 nowadays Individual investors become more dependent on multimedia information and increase their understanding by information that posted on the web. Investors will collect all the relevant company stock information before they decide to investing their funds. This research is using control variable to clearly explain the influence of main variable or the independent variable which is investor attention of company stock information using Google search volume to the dependent variables. It support by dictionary.com that control variable is a factor held constant to test the relative impact of an independent variable http:dictionary.reference.com. Control variable that used in this research are: product, offer r s s, and opportu tuni ni ty ty that makes them to be more conf f id id en ce in makes a financial decision. b. b. Information Ac Ac co co rding to Merton, R Rob ober rt t C. C 1987 base sed on asset pr pr icing mo mo d de ls, investo rs act on ev er er y y type e of f pu publicly a ava v ilable in in f format ion instantane ou sly as soon as it r ec c ei e ve d d. T The here re are two informatio n costs: 1 t he cost of gat he ring and p ro ocess s in ing g d data an nd 2 the cost o f transm itti ng inf or ma tion from one pa a rt r y to to a a no no ther so ur ce o f inform at ion su ch as firm i tsel f, stock m ar ke k t adviso o ry ry services, br okerag e houses, an d pr ofessional portfol io o mana agers s . Ac co rd rd in in g g to to L L ee et al. 200 00 8 8 n n ow ow ad ad ay s In dividu u al al investo to rs rs become more depend nd en en t t on multimedia information and incr crea ea s se their understanding by information that posted o o n n h the e we we b. I Inve e st stor or s s will col ol le lect ct a a ll ll t t he he relevan n t t co comp m any stoc k in n fo form rm ation be be fo fore they decide t t o invest t in ing their funds. This research is using co ontrol varia a ble to clearly explain the influence of main variable or the independent t variable w which is investor attention of company stock information using Google se search h volume to the dependent variables. It support by dictionary com that control l variable is a factor held constant to test the 15 a Size According to Cornett et al. 2009 company size can be measure by market capitalization or market value. According to InvestingAnswer market value of equity is the total market value of all of a companys outstanding shares http:www.investinganswers.com. b Market to book ratio Market to book ratio is risk factors that must be consider by the investor. If the price is high it indicating that the firm is undervalued. A value that less than 1 is means that the firm is undervalued. The higher the market to book ratio is better the firm. c Age The company age, start from the company IPO until the years 2013. d PE ratio Price earnings ratio PE ratio is to understand the effect of market towards stock performance that can be seen from the EPS. It compares the stock price with earning per share. According to Cornett et al. 2009 price earnng ratio is measure the willingnes of investors to pay for each dollar the company earn per share of its stocks. The higher the price earning ratio is the better the compamy performance. market capitalization or mar ar ke ke t t value. A A cc ccor or ding to InvestingAnswer market value of equity is t t he he total market value of all of a comp mpanys outstanding shares http:www. w. in investinganswers.c c om om. b M Market to bo ok ok r r at at i io Ma a rk rk et et t t o o book k r r at at i io is risk fac to rs that mu st st b b e cons sid ider er b b y y the inve vestor. If the pr pr ic ic e e is is h igh h i it ind ic at ing that the f ir m is undervalu ed . A A value t t ha ha t t le le ss tha han 1 is m m eans tha ha t the firm is un dervalued. T he higher th e market to bo book r rat atio io is bett e er th th e e fi f rm . . c Ag e The co o mp any age, start fro m the co mpany IP O un ti l the years 2013. d d P E ra ti o Price earnings ratio PE ra ra ti t o o is to understand the effect of ma mark rk e et to towa ward rd s s stock performance that can be seen from the EPS. It comp p ar ar es es the he s s to to ck pr pric ice e with h ear i ning p p er er s s ha hare. Acco co rd rdin in g g to to C Cornett et et a a l. l 2 2 00 00 9 9 p i rice ear ar nn nn g g ratio is mea ea su su re the w w il il li lingnes of inves s to t rs to pa pay for each dol l la la r r th th e comp mp an any earn per share of its stocks. The higher th the price ea a rning ratio is the better the compamy performance. 16

2.1.3 Capital Market