Moderating influence of advisor personality on the association between financial advice and investor stock trading behavior

Abstract

Purpose: The purpose of this paper is to investigate the role of financial advice on investor trading behavior by analyzing the influence of advisor personality.

Design/methodology/approach: The study utilized the Big Five personality framework from Costa and McCrae (1992) to measure personality traits of advisors and examined the data collected from 314 stock investor–advisor dyads. Personality traits of advisors were measured by the NEO-Five Factor Inventory (Costa and McCrae, 1989). Confirmatory factor analysis was conducted to assess the fitness of the Big Five model. We followed two-stage least square method for estimating endogenous covariate by employing instrumental variable analysis. Probit model was used to evaluate the moderating influence of advisor personality traits on the association between the usage of financial advice and trading behavior.

Findings: The authors found that financial advice positively impacts investors’ stock trading frequency. The authors also provide empirical evidence that financial advice is more likely to increase trading frequency when advisor personality tends to be openness, conscientiousness and agreeableness. On the other hand, information acquired from financial advisors causes fewer adjustments in investors’ portfolios when the personality of advisors is likely to be extraverted and neurotic.

Research limitations/implications: The theoretical model in our study seeks to explain that a psychological factor, namely, advisor personality, influences the way an investor interprets information signals from financial advice, which, in turn, influences the investor’s decision to trade in securities.

Practical implications: This research suggests that characteristics of advisors other than those of investors can be of relevance for policy makers in their attempts to improve their business in the financial services industry.

Originality/value: Survey-based studies in finance are lacking. This study adds to the existing literature of behavioral finance that accounts for the observed variations in investors’ financial decision making explained by psychological factors. No previous study has been conducted so far exploring variations in the impact of financial advice on investors’ stock trading behavior by the Big Five advisor personality, and this paper strives to fill this research gap in Chinese stock market.