Herding behavior, disposition effect, and investment decisions: A multi-mediation analysis of risk perception and dividend policy

The traditional perspective of finance believes that volatility in the stock market is due to market efficiency. However, the perspective of modern behavioral finance is more concerned with the emotional and psychological factors associated with an investor. This research aims to identify the multi-mediating mechanism of risk perception and dividend policy in the Pakistan Stock Exchange (PSX). The cross-sectional quantitative design was used, and the data was collected from 256 individuals for further analysis. The structural equation modelling (SEM) was used to assess the multi-mediation mechanism. The statistical results confirm that there is a significant positive impact of herding behavior and disposition effect on investment decisions. Moreover, this direct relationship is further assessed by inducting risk perception and dividend policy as mediators. The multi-mediation was proved by observing the specific effects. The results confirmed that individuals with an outcome of investment decision intend to behave more positively. Hence, individual investors having herding behavior and disposition effect produce an emphasizing effect on investment decision because it is mitigated with the simultaneous mediating effects of risk perception and dividend policy. The findings imply that investors should be aware of their behavioral factors and policymakers have to make their strategy accordingly.