Moderating Influence Of Investor Big Five Personality Traits On The Association Between Information Acquisition And Stock Trading Behavior

The advocates of traditional financial theory believed that individual investors are perfectly rational;therefore process all market information to make optimalfinancial decisions.However sometimes investors may not always process all relevant market information because they are influenced by various psychological factors which lead them to make investment choices that do not maximize their expected utility.Behavioral finance provides the explanation of this phenomenon.Behavioral finance is an emerging field that combines the behavioral or psychological aspects of human behavior with conventional economic and financial theories to provide explanation of why people make non-rational financial decisions(Pompian,2006).One of the psychological factors that can influence investor behavior and therefore may lead him to make non-rational financial decisoin is his personality.The purpose of this study is to investigate the impact of information acquisition(frequency of information,the key sources of information)on investors' stock trading behavior.The study also examined the moderating influence of the investor personality on the association between information acquisition and trading behavior.To measure the Big Five personality traits of investors,the study adopted NEO-FFI(Costa&McCrae,1989)inventory and examined the data collected from 541 individual investors of Chinese stock market.Reliability and validity of personality constructs were determined by standard psychometric procedure using exploratory factor analysis(EFA)and confirmatory factor analysis(CFA)techniques.To overcome the potential endogeneity bias,the study followed the two-stage least square(2SLS)method for estimating endogenous covariate by employing instrumental variable(IV)analysis.The study performed probit regression estimation to evaluate the moderating influence of investor personality traits on the association between information acquisition and stock trading behavior.The study also conducted several other tests to check the robustness of its key findings.Results of this study indicate that the frequency of information acquisition is directly proportional to trading frequency.Similarly,the key sources of information used by investors as a foundation of their financial choices have a significant influence on their stock trading behavior.In addition to that,the study adds to the existing literatureby providing empirical evidence that the Big Five personality traits of investor moderate the relationship between the frequencyof information acqausition and stock trading behavior.Extraversion and conscientiousness positively moderate the relationship between the frequency of information acquisition and trading frequency;and openness negatively moderates the relationship between the frequency of information acquisition and trading frequency.Finally,the study also provide empirical evidence that investor personality traits moderate the relationship between the key sources of information and stock trading behavior.Financial advice tend to increase the frequency of trading in investors with openness,extraversion,neuroticism and agreeableness personality traits,and tend to decrease the intensity of trading in investors with conscientiousness trait.On the other hand,financial information acquired from word-of-mouth communication is more likely to enhance trading frequency in extraverted and agreeable investors,and is more likely to to reduce trading frequency in investors with openness,conscientiousness and neuroticism traits.Finally,the use of specialized press leads to more adjustment in portfolios of the investors with openness and conscientiousness traits than those with other personality traits.This research combines both the information search literature and the behavioral finance literature to investigate that information acquisition that relates to asset allocation decisions is influenced by investor personality traits.The findings of the current study also adds to the existing models of investor behavior that relate investors' information search strategies with their trading behavior,and study extends this literature by considering yet another psychological discipline:personality psychology,to explain the reasons for the variations in individual investors' trading behavior when they use various information acquisition strategies.The theoretical model in our study seeks to explain that investors of various personality types may influence the way investor interpret signals from information signals thereby influencing their decisions to trade in stocks.The study offers new theoretical insights into investors' behavior due to the characteristics of Chinese stock market which are uniquely different from other stock markets in the world.No previous study has been conducted so far in Chinese stock market to explore variations in the impact of investors' information acquisition on their stock trading by the Big Five personality and this paper strives to fill this research gap.