Abstract
Behavioral financing is an emerging science and a relatively new area for academic research, leveraging investors’ irrational behavior. To a certain degree, most investment decisions are affected by investors’ biases and expectations, which do not follow rationality requirements. This study rigorously investigated a group of behavioral financial factors—optimism, pessimism, overconfidence, herd behavior, and loyalty—and firm characteristics, and then it examined whether and to what extent behavioral financial factors drive investors’ behaviors about the largest initial public offerings (IPOs). This study employed structural equation modelling and used a representative survey of 353 investors during the IPO of Saudi Aramco. The study found that the factors that stimulated investors in the Saudi market, especially during the Aramco IPO behavior decision, included behavioral finance factors, such as optimism, overconfidence, loyalty, and herd behavior, while firm characteristics failed to shape investors’ decisions during Aramco’s IPO.
Highlights
The controversy about how behavioral finance factors shape investors’ decisions, especially their initial public offering (IPO) investment behavior, has generated practical questions (Alcaniz et al, 2017)
Modern portfolio theory assumes that investors in financial markets are not puzzled about the amount of information, and they are not controlled by behavioral financial factors (Alquraan et al, 2016), while, their inclinations and emotional and psychological biases might affect their rationality, especially during IPO behavior decisions that have a limited time (Barberis et al, 1998; Haruvy et al, 1999; Akerlof and Shiller, 2010; Dhaoui et al, 2013; Dhaoui, 2015; Alquraan et al, 2016)
This study distinguishes itself from existing studies in the following manner: while most behavioral finance studies concentrate on the decisions of investors when trading stocks, the current study focused on investors’ decisions during an IPO investment decision
Summary
The controversy about how behavioral finance factors shape investors’ decisions, especially their initial public offering (IPO) investment behavior, has generated practical questions (Alcaniz et al, 2017). Traditional financial theory has concentrated on the rationality of financial decisions with the view to maximize investors’ wealth by following traditional financial rules and trading-off risks and returns by adopting new models (Virigineni and Rao, 2017; Baddeley, 2018; Singh, 2019). Modern portfolio theory assumes that investors in financial markets are not puzzled about the amount of information, and they are not controlled by behavioral financial factors (Alquraan et al, 2016), while, their inclinations and emotional and psychological biases (optimism, pessimism, overconfidence, herd behavior, and loyalty) might affect their rationality, especially during IPO behavior decisions that have a limited time (Barberis et al, 1998; Haruvy et al, 1999; Akerlof and Shiller, 2010; Dhaoui et al, 2013; Dhaoui, 2015; Alquraan et al, 2016).
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