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An empirical study on investors preference between equity and debt



In todays scenario there has been a major change i.e. economic prosperity all over. The entire

world is talking about the robust growth rates in this part of the world. The availability of huge

investible surplus is due to higher income levels and booming stock markets. The investors

with higher risk appetite want to experiment and try new and exotic products in the name of

diversification. This has resulted in emergence of new options within the same or fresh asset

classes. The common perception of investors is to buy when the market supports in uptrend

and not to invest in the falling time. They wait for the stabilization in the market. Markets

have personalities because investors have emotions. Markets are ultimately driven by people

and stock prices are what individuals make them out to be. People have a tendency to see their

own actions and decisions as totally

rational, when the truth is they may not be.



Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the

close of 18th century when the East India Company used to transact loan securities. In the

1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in

An empirical study on investors preference between equity and debt

Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840

and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town

Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This

banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange

flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil

War broke and the cotton supply from the US to Europe stopped. Further the brokers

increased to 250. The informal group of stockbrokers organized themselves as the Native

Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay

Stock Exchange (BSE).

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the

BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and

Hammam Street in downtown Mumbai) was acquired, and a building was constructed and

occupied in 1930.Premchand Roychand was a leading stockbroker of that time, and he assisted

in setting out traditions, conventions, and procedures for the trading of stocks at Bombay

Stock Exchange and they are still being followed. Several stock broking firms in Mumbai

were family run enterprises, and were named after the heads of the family.

The following is the list of some of the initial members of the exchange, and who are still

running their respective business:

D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill

Lynch) Jamnadas Morarjee (now known as JM) Champaklal Devidas (now called CIFCO


An empirical study on investors preference between equity and debt

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock

exchange in the country under the Securities Contracts (Regulation) Act. The most decisive

period in the history of the BSE took place after 1992. In the aftermath of a major scandal with

market manipulation involving a BSE member named Harshad Mehta, BSE responded to calls

for reform with intransigence. The foot-dragging by the BSE helped radicalize the position of

the government, which encouraged the creation of the National Stock Exchange (NSE), which

created an electronic marketplace.

NSE started trading on 4 November 1994. Within less than a year, NSE turnover exceeded the

BSE. BSE rapidly automated, but it never caught up with NSE spot market turnover. The

second strategic failure at BSE came in the following two years. NSE embarked on the launch

of equity derivatives trading. BSE responded by political effort, with a friendly SEBI

chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE and D. R.

Mehta succeeded in delaying the onset of equity derivatives trading by roughly five years. But

this trading, and the accompanying shift of the spot market to rolling settlement, did come

along in 2000 and 2001 - helped by another major scandal at BSE involving the then President

Mr. Anand Rathi.

NSE scored nearly 100% market share in the runaway success of equity derivatives trading,

thus consigning BSE into clearly second place. Today, NSE has roughly 66% of equity spot

turnover and roughly 100% of equity derivatives turnover. Stock Exchange provides a trading

platform, where buyers and sellers can meet to transact in securities.


The different segments of the Indian Financial System (IFS) are monitored and controlled by

statutory bodies called Regulatory institutions. These Institutions have been given adequate

powers by legal acts or by acts of parliament to enable them to supervise the segments

An empirical study on investors preference between equity and debt

assigned to them. It is the duty of the regulator to ensure that the players in the segment work

within recognized business parameters maintain sufficient levels of disclosure and

transparency of operations and do not act against national interests. At present, the IFS has

two regulatory arms i.e.

Reserve Bank of India (For Banks and NBFCs)

Security and Exchange Board of India (For Capital Markets)


Reserve Bank of India, the Central Bank of the country, is at the heart of the Indian Financial

and Monetary system. It was established on April 1, 1935 as a private shareholders' institution

under the Reserve Bank of India Act 1934. It was nationalized in January 1949, under the

Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the

central government, in consultation with the Governor of the Bank; to issue such directions to

RBI as might be considered necessary in the public interest. A Central Board of Directors with

20 members consisting of the Governor and the Deputy Governors governs RBI. The

Governor and the deputy Governors of the Bank are Government of India appointees.

Functions of the RBI:

Maintaining financial stability to enable growth of sound Financial Institutions. This should,

in turn, enable monetary stability and allow economic units to carry out their business with


An empirical study on investors preference between equity and debt


ntaining monetary stability for growth and proper functioning of a mixed economic system in

the country.


maintain a stable payments and currency system and to facilitate safe and efficient execution

of financial transactions.


promote a stable financial structure of markets and systems and to help them operate with

optimum efficiency


regulate the money and credit supply in the economy to help maintain price stability to a

reasonable extent.


The SEBI was established on April 12, 1988 through an administrative order, but it became a

statutory and really powerful organization only in 1992 when the Controller of Capital Issues

was abolished. Government of India (GOI) issued an ordinance on 30th Jan 1992 and pursuant

to this ordinance SEBI was set up on 21st Feb 1992. The SEBI Act replaced this ordinance on

4th April 1992.

The regulatory powers of the SEBI were increased through the Securities Laws (Amendment)

Ordinance of January 1995, which was subsequently replaced by an Act of Parliament. SEBI

is under the overall control of the Ministry of Finance. Its Head Office is in Mumbai (formerly

Bombay). It has since become a very important constituent of the financial regulatory

framework in India.

An empirical study on investors preference between equity and debt


SEBI was constituted to protect the interests of investors in securities and to promote the

development of and to regulate the securities market through appropriate measures

Some of the measures include:

Regulating the business in stock exchanges and any other securities markets.

Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents,

bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,

underwriters, portfolio managers, investment advisers and such other intermediaries who may

be associated with securities market in any manner.


istering and regulating the working of collective investment schemes, including mutual funds.


moting and regulating self-regulatory organizations.


hibiting fraudulent and unfair trade practices in securities market.


moting investor education and training of intermediaries in securities market.


hibiting insider trading in securities.


ulating substantial acquisition of shares and take-over of companies.

An empirical study on investors preference between equity and debt


ling for information, undertaking inspection, conducting enquiries and audits of the stock

exchanges and intermediaries and self-regulatory organizations in the securities market.

1.3) Factors affecting investment decision

The investment decision is affected by many factors. The following are the factors which

influence the investment decision of the investors:-

1) Ti

me Horizon

One of the most important factors for investors when choosing investments is how long their

money will remain invested. Investors with short time horizons usually prefer conservative

investments with less chance of going down in value to make sure their money is available

when they need it. Short time horizon investment goals such as saving for a down-payment

may call for a low-risk and low-return term deposit. Investors with longer time frames to meet

their goals may choose riskier investments, as there is a longer time for investments to recoup

short-term losses should they occur. A retirement plan for someone in her twenties has a

longer time horizon and may be better suited for investments with higher potential returns and


2) Ris

k Tolerance

Risk tolerance refers to how comfortable an investor would be should the value of his

investment decline significantly. Higher risk investments also have the potential for higher

returns, while lower risk investments are more conservative and usually have lower returns.

An investor with a higher risk tolerance is willing to take the chance of losing money for the

possibility of a superior return on investment.

An empirical study on investors preference between equity and debt

3) Inv

estment Knowledge

An investor's experience and knowledge are important factors in her investment choices.

Novice investors may choose to rely on the advice of family, friends or an investment adviser

when selecting investments. More experienced investors often choose their own investments.

Understanding the risks involved and potential investment outcomes helps them decide if

stocks, bonds or other investments suit their portfolio.

4) Inc

ome and Net Worth

An individual's income and net worth are also important factors in making investment choices.

Purchasing certain equity investments, such as stock, often requires thousands of dollars of

capital, while you can purchase mutual funds with a few hundred dollars. New investment

plans for young investors with limited incomes often are set up with contributions of less than

$100 a month directed to a mutual fund composed of stocks and bonds of many different

issuers. Bonds, term deposits and guaranteed investment certificates usually have a minimum

purchase amount of at least $1,000. Investors with larger amounts of capital have access to a

wider range of investment choices, while new investors or those with a lower net worth have a

limited selection.

5) Pas

t market trends

Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to

understand how various asset classes have performed in the past before planning your finances

An empirical study on investors preference between equity and debt

1.4) Financial markets

A financial market is a broad term describing any marketplace where buyers and sellers

participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial

markets are typically defined by having transparent pricing, basic regulations on trading, costs

and fees, and market forces determining the prices of securities that trade.

Financial markets can be found in nearly every nation in the world. Investors have access to a

large number of financial markets and exchanges representing a vast array of financial

products. Some of these markets have always been open to private investors; others remained

the exclusive domain of major international banks and financial professionals until the very

end of the


A) Money


It is a MONEY CAPITAL segment of


market in which


instruments with high liquidity and very short maturities are traded. The money market is used

by participants as a means for borrowing and lending in the short term, from several days to

just under a year. Money market securities consist of negotiable certificates of deposit (CDs),

bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds

and repurchase agreements (repos).

An empirical study on investors preference between equity and debt

The money market is used by a wide array of participants, from a company raising money by

selling commercial paper into the market to an investor purchasing CDs as a safe place to park

money in the short term. The money market is typically seen as a safe place to put money due

the highly liquid nature of the securities and short maturities, but there are risks in the market

that any investor needs to be aware of including the risk of default on securities such as

commercial paper.

B) Capital markets:-

Capital Market is the market in which long term financial instruments, such as bonds, equities,

mutual funds and derivative instruments are traded. Capital Market serves as an alternative for

a company's capital resources and public investment. It also facilitates the infrastructures

needed for the selling and buying process and other related activities.

Capital Markets can be defined as the activity of trading and offering securities to the public,

the activity of a public company with respect to securities it has issued, and the activities of

securities-related institutions and professions.

Capital Market plays an important role in the economy of a country because it serves two

functions all at once.

1) Cap

ital Market serves as an alternative for a company's capital resources. The capital gained from

the public offering can be used for the company's business development, expansion, and so on


Capital Market serves as an alternative for public investment. People could invest their money

according to their preferred returns and risk characteristics of each instrument.

An empirical study on investors preference between equity and debt

Any government or corporation

requires capital (funds) to finance

its operations and to engage in its own

long-term investments. To do this, a

company raises money through the

sale of securities - stocks and bonds in the company's name. These are bought and sold in the

capital markets.


Equity market is one of the key sectors of financial markets where long term financial

instruments are traded. The purpose of equity instruments issued by corporations is to raise

funds for the firms. The provider of the funds is granted a residual claim on the companys

income, and becomes one of the owners of the firm. For market participants equity securities

mean holding wealth as well as a source of new finance, and are of great significance for

savings and investment process in a market economy.

i.Primary Market is the market for new securities issues and is facilitated by underwriting

groups. The companies sell their securities to the public directly to the investors through the

underwriters (normally investment banks for stock and bond issuance). When the firm is

issuing shares for the very first time, it is called Initial Public Offering (IPO). New shares

An empirical study on investors preference between equity and debt

issued by firms whose shares are already trading in the market are called seasoned or

secondary issues. Issuing company receives cash from the sale and uses it to expand or fund

the operations. After the initial sale, the securities trading will be conducted on the secondary


ii.Secondary market, also known as the aftermarket, is the market where the trading of the

previous issued securities is conducted. On a secondary market, an investor buys securities

from another investor instead of the issuer. It is important that the secondary market provides

liquidity and therefore provides continuous information about the market price of the


iii.Stock market: Stock Market is a market where the trading of company stock, both listed

securities and unlisted takes place. It is different from stock exchange because it includes all

the national stock exchanges of the country. For example, we use the term, "the stock market

was up today" or "the stock market bubble."

Stock Exchanges are an organized market place, either corporation or mutual organization,

where members of the organization gather to trade company stocks or other securities. The

members may act either as agents for their customers, or as principals for their own accounts.

Stock exchanges also facilitates for the issue and redemption of securities and other financial

instruments including the payment of income and dividends. The record keeping is central but

trade is linked to such physical place because modern markets are computerized. The trade on

an exchange is only by members and stock broker do have a seat on the exchange.

A) Fea

tures of Equity Shares:

Equity shares have the following features:

An empirical study on investors preference between equity and debt

(i) Equity share capital remains permanently with the company. It is returned only when the

company is wound up.

(ii) Equity shareholders have voting rights and elect the management of the company.

(iii) The rate of dividend on equity capital depends upon the availability of surplus funds.

There is no fixed rate of dividend on equity capital.


Advantages and disadvantages of equity:-

Sr. no Advantages Disadvantages

1 Capital gains No fixed dividend

2 Limited liability High risk

3 Exercise control Fluctuation in market

4 Claim over assets Limited control

5 Bonus shares Residual income


Debt markets are used by both firms and governments to raise funds for long-term purposes,

though most investment by firms is financed by retained profits. Bonds are long-term

borrowing instruments for the issuer. Major issuers of bonds are governments and firms,

which issue corporate bonds Corporate as well as government bonds vary very considerably in

An empirical study on investors preference between equity and debt

terms of their risk. Some corporate bonds are secured against assets of the company that

issued them, whereas other bonds are unsecured. Bonds secured on the assets of the issuing

company are known as debentures. Bonds that are not secured are referred to as loan stock.

Banks are major issuers of loan stock.

Retail trading in Central Government Securities commenced on January 16, 2003. The

transaction sizes in the Wholesale. Debt Market are so large that individual investors cant

participate in it. So there is a separate market called the Retail Debt Market for individual

investors. But the retail investors dont have much of a choice as far as investment in the Debt

Market is concerned. NSE has introduced a trading facility through which retail investors can

buy and sell government securities from different locations in the country through registered

NSE brokers in the same manner as they have been buying and selling equities. This market is

known as Retail Debt Market

This segment provides a trading platform for a wide range of Fixed Income securities that

includes Central government securities, Treasury Bills (T-bills), State Development Loans

(SDLs), bonds issued by Public Sector Undertakings (PSUs), Floating Rate Bonds (FRBs),

Zero Coupon Bonds (ZCBs), Index Bonds, Commercial Papers (CPs), Certicates of Deposit

(CDs), Corporate Debentures, SLR and non-SLR bonds issued by Financial Institutions (FIs),

bonds issued by Foreign Institutions and units of Mutual Funds (MFs).

The Commercial Banks and the Financial Institutions are the most prominent participants in

the Wholesale Debt Market in India. During the past few years, the investor base has been

widened to include Co-operative Banks, Investment Institution, Cash rich corporate, Non-

Banking Finance companies, Mutual Funds and High Net-worth Individuals.

An empirical study on investors preference between equity and debt

A) Fea

tures of debt market:

Each debt instrument has three

features: Maturity, coupon

and principal.


turity: Maturity of a bond refers to the date, on which the bond matures, which is the date on

which the borrower has agreed to repay the principal.


upon: Coupon refers to the periodic interest payments that are made by the borrower (who is

also the issuer of the bond) to the lender


ncipal: Principal is the amount that has been borrowed, and is also called the par value or face

value of the bond.

An empirical study on investors preference between equity and debt

B) Ad

vantages and disadvantages of debt:-

Sr. no Advantages Disadvantages

1 Safety No control

2 Regular fixed income No extra profits

3 High returns Business debt obligation

4 Liquidity Repayment

5 Tax benefit Restricted cash flows

1.7) Difference between equity and debt:-


Capital Can go down Protected

Upside Upside is possible Generally, no


Fixed interest payment Nothing is guaranteed Present

Convertibility Equity cannot be converted Debt can be

into debt converted into


An empirical study on investors preference between equity and debt

Statutory procedures More statutory procedures to Less statutory

be followed for increasing procedures to be

equity followed for

increasing debt

Relationship Growth partner Lender-


Risk involved Relatively high Relatively low

Repayment Typically, no repayment Periodic

Collaterals Generally, Not required Required

Management influence Common stock holders have None. Unless

voting rights special conditions

have been agreed

Tax benefits Dividend is not tax deductible Interest is tax


Market Capital market Credit market

1.8) Debt vs. Equity:-

Generally, capital raised for new businesses takes one of two structures: debt or equity. Debt

capital is raised in the form of a loan or promissory note to be paid back at some point in the

future usually with interest. Conversely, equity is issued as stock in a company, representing a

form of ownership with no defined maturity date.

An empirical study on investors preference between equity and debt

Investing in Debt:

In a debt financing, there are two parties to the transaction, the debtor and the creditor. In

exchange for capital, the company (debtor) will issue a loan or promissory note to the investor

(creditor). The documents governing and representing the loan will outline the complete

provisions of the transaction; however, there are a handful of key terms investors should

understand before investing in a debt product.

Principal: amount of capital originally invested in a debt product.

Interest rate: the percentage rate, usually quoted annually, at which interest is paid by the

debtor to the creditor while the loan is outstanding.

Interest: the cash paid to the creditor by the debtor until loan maturity calculated as (interest

rate payment frequency) * outstanding principal balance.

Amortization: the act of paying the principal balance over time between the issuance of the

loan and loan maturity.

An empirical study on investors preference between equity and debt

Maturity: the date at which the outstanding principal balance must be paid and returned to a

creditor in full.

Default: failure to make timely payments of principal or interest.

An attractive aspect of debt financing is current income generated through interest payments

over the life of the loan. Typically, interest is paid to creditors on a quarterly or monthly basis

providing cash flow to investors while the principal is outstanding. Principal can be amortized;

meaning paid in installments over the life of the loan, or paid in full at maturity, known as a

bullet maturity.

Investing in Equity:

When an investor makes an equity investment, he or she is issued shares in exchange for

capital and becomes a shareholder, or owner, of the company. There are two types of equity

securities routinely used in financing new businesses: preferred and common. As owners of a

company, both common and preferred shareholders have voting rights related to the board of

directors, ultimately influencing control over the companys activities and direction.

While the equity portion of a publicly traded companys capital structure will more heavily

lean towards common, venture capital investors typically utilize a preferred equity structure

due to certain rights and privileges afforded preferred shareholders, most notably a liquidation

preference. Prior to making an investment in preferred equity its important to understand the

additional features attached to preferred shares.


Preferred shareholders are typically entitled to a dividend, if and when declared by the board

of directors, before any dividends are paid to common shareholders. Dividends for preferred

An empirical study on investors preference between equity and debt

shareholders are established at a percent of the principal, similar to an interest paying debt

product, usually between 4% and 10% annually.

Liquidation Preference:

A liquidation preference ensures that in the event of a liquidation or winding up of the

company, preferred shareholders receive back at least the original investment value and often

times a multiple thereof before any distributions are made to common shareholders. A

liquidation preference of 1x is typical, although a preference of 3x is not uncommon. In

addition to a multiple preference, some preferred equity structures include participating

provisions whereby preferred shareholders will receive a multiple of the original purchase

price and then participate ratably on an as-converted basis in the remaining proceeds of the

liquidity event. As-converted simply refers to the preferred shareholders participation if each

preferred share was converted into a common share.

Conversion Features:

Most always preferred shares are convertible into common shares at the option of the preferred

shareholder at a 1:1 conversion ratio. There are several instances where conversion into

common could be advantageous to a preferred shareholder including an acquisition of the

company at a value well exceeding the liquidation preferences, where common shareholders

receive a greater amount of the acquisition proceeds. Some preferred structures include

automatic conversion provisions where if the company is executing a Qualified Initial Public

Offering above a certain valuation threshold, preferred shares are converted into common to

enable selling in the secondary market following a public offering.

An empirical study on investors preference between equity and debt


Pay-to-play provisions are used to incentivize early investors to participate in future financing

rounds. Essentially, if an investor subject to a pay-to-play provision does not participate in a

future financing round of the company, the investor could lose certain rights and privileges

associated with preferred stock. In a stricter construct, if an investor does not participate in his

or her pro rata participation in a future financing round, the preferred stock could be converted

to common. Pay-to-play provisions can be helpful to both entrepreneurs and investors.

Board of Directors:

In a preferred equity investment, investors will negotiate for the ability to join the board of

directors in order to influence company direction and serve as a proxy for preferred

shareholders. By taking a board seat, investors can actively monitor activities of the company,

ensuring the companys actions are in the best interest of investors and employees.

While additional terms are found in a typical preferred equity financing, the few listed above

serve as the primary reasoning behind venture capital investors pursuing a preferred stock

structure when making an equity investment. As implied earlier, another advantage to

preferred stock is its seniority to common stock.

Common stock ranks as the lowest priority in a companys capital structure, and consequently,

is often the class of stock held by company founders and employees. While common

stockholders are afforded certain voting rights, economic participation in the event of a

liquidity event or declaration of dividends is subordinate to creditor and preferred shareholder

cash distributions. Given its relative rank in the capital structure, common stockholders often

An empirical study on investors preference between equity and debt

assume the most risk of any investor class in a given company, while potentially reaping the

greatest rewards

While debt investments can provide a stable cash flow stream and security for investors,

participation in value expansion, and return on investment, is capped at the interest and

principal payments outlined in the financing documents. By taking on more risk as an equity

investor, one can economically participate in a companys value creation activities providing

an enhanced return profile relative to a companys debt offerings. Given this dynamic, several

early stage venture capital investors utilize a convertible note structure, a financial product that

begins as a debt instrument and converts into equity at a future date.



1) Yo

on Je Cho (1998) showed in his study that increasing turnover figures in the Indian stock

An empirical study on investors preference between equity and debt

exchanges from 1994-95 to 1996-97, implying that they are dominated by speculative

investments, which is not unusual in emerging markets. However, trading volumes in the

Indian capital market are fairly large compared to those in other emerging markets. The

substantial increase in turnover may be attributed primarily to the expansion of the NSEs

trading network. But this also reflects the fact that the Indian stock market is dominated by

speculative investments for short-term capital gains, rather than long-term investment.

2) Ab

dulla Yameen (2001) delivered massage, investors will need to be alert to any new

development in capital market and take advantage of the Investor Education and Awareness

Campaign program which to be undertaken by the Capital Market Section to acquaint of the

risks and rewards of investing on the Capital market. Speech was also focused on to create a

new breed of financial intermediaries, which will deal on the market for their clients. These

intermediaries have to be professionals with quite advanced knowledge on stock exchange

operations, techniques, law and companies valuation. Investors depend to a large extent on

their professional advice when investing on the market. Furthermore, these intermediaries

must be men of integrity and honesty as they would deal with clients money Confidence of

investors in these professionals is a key to the success of the capital market.

3) P.

M. Deleep Kumar and G. Raju (2001) showed that the capital market is becoming more and

more risky and complex in nature so that ordinary investors are unable to keep track of its

movement and direction. The study revealed that the Indian market is probably more volatile

than developed country markets, which is probably why a much higher proportion of savings

in developed countries go into equities.

An empirical study on investors preference between equity and debt

4) S.

M. Imamual Haque and Khan Ashfaq Ahmad (2002) argued that the sluggish trends in

primary equity markets need to be reverse by restoring investors confidence in market.

Savings for retirement essential seek long term growth and for that investment in equity is

desirable. It is a well-established fact that investments in equities give higher returns than debt

and it would, therefore, be in the interest of the banks to invest in equities.

5) Sw

arup K. S. (2003) empirically found that equity investors first enter capital market though

investment in primary market. The main reason for slump in equity offering is lack of investor

confidence in the primary market. It appeared from the analysis that the investors give

importance to own analysis as compared to brokers advice. They also consider market price

as a better indicator than analyst recommendations. Accordingly number of suggestive

measures in terms of regulatory, policy level and market oriented were suggested to improve

the investor confidence in equity primary markets.

6) Ley

la enturk Ozer, Azize Ergeneli and Mehmet Baha Karan (2004) studied that the risk factor is

one of the main determinants of investment decisions. Market participants that are rational

investors ultimately should receive greater returns from more risky investments. They also

concluded that the crisis and resulting deep recession in 2002 changed many things, including

market confidence of investors and financial analysts. In addition to decreasing trading

volume of Istanbul Stock Exchange (ISE), the number of individual investors reduced and

investment horizon of investors shortened and liquid instruments.

An empirical study on investors preference between equity and debt

7) Raj

eswari, T. R. and Moorthy, V. E. R. (2005) said that expectations of the investors influenced

by their perception and human generally relate perception to action. The study revealed that

the most preferred vehicle is bank deposit with mutual funds and equity on fourth and sixth

respectively. The survey also revealed that the investment decision is made by investors on

their own, and other sources influencing their selection decision are newspapers, magazine,

brokers, television and friends or relatives.

8) J.

K. Nayak (2006) interpreted the preferred mode of investment is first equity, banks, mutual

fund and then any other in a descending order. It means Investors faith has increased and their

risk taking ability has also increased. One thing that could be drawn from this study is that

problems are mostly broker related and therefore that is one area where reforms are required.

The investors feel that the amount of knowledge available on the equity market is not

satisfactory. Investors, it appears, need to be educated more. Investors still considered the

capital market as highly risky. But from the investment pattern from the descriptive statistics it

seems that the number of people willing to invest in capital market has increased.

9) Phil

ipp Schmitz and Martin Weber (2007) exposed that the trading behavior is also influenced if

the underlying reaches some exceptional prices. The probability to buy calls is positively

related to the holding of the underlying in the portfolio, meaning that investors tend to

leverage their stock positions, while the relation between put purchases and portfolio holdings

of the underlying is negative. They also showed higher option market trading activity is

An empirical study on investors preference between equity and debt

positively correlated with past returns and volatility, and negatively correlated with book-to-

market ratios. In addition they report that investors open and close long and short call

positions if past week's return is positive and write puts as well as close bought and written put

positions if the past returns are negative.

10) B.

Das, Ms. S. Mohanty and N. Chandra Shil (2008) studied the behavior of the investors in the

selection of investment vehicles. Retail investors face a lot of problem in the stock market.

Empirically they found and concluded which are valuable for both the investors and the

companies having such investment opportunities. First, different investment avenues do not

provide the same level of satisfaction. And majority of investors are from younger group.

11) Pra

sanna P. K. (2008) empirically fond that foreign investors invested more in companies with a

higher volume of shares owned by general public. Foreign investors choose the companies

where family shareholding of promoters is not essential. The study concluded that corporate

performance is the major influencing factor for investment decision for any investor. As far as

financial performance is concerned the share return and earnings per share are significant

factors influencing investment decision.

12) Ga

urav Kabra, Prashant Mishra and Manoj Dash (2010) studied key factors influencing

investment behaviour and ways these factors impacts investment risk tolerance and decision

making process among men and women and those different age groups. They said that not all

investments will be profitable, as investor will not always make the correct investment

An empirical study on investors preference between equity and debt

decisions over the period of years. Through evidence they proved that security as the most

important criterion; there is no significant difference of security, opinion, hedging in all age

group. But there is significant difference of awareness, benefits and duration in all age group.

From the empirical results they concluded the modern investor is a mature and adequately

groomed person.

13) RR

Rajamohan (2010) analyzed the role of the financial knowledge is important in decision

making in information intensive assets like stocks and other risky securities. Hence, reading

habit, as a proxy for financial knowledge. Younger people have greater labor flexibility than

older people; if the returns on their investments turn out to be low, they could work more or

retire later. Hence age an important factor to be considered in household portfolio analysis.

14) M.

Sathish, K. J. Naveen and V. Jeevanantham (2011) studied in the options available to investors

are different and the factors motivating the investors to invest are governed by their socio-

economic. They argued that instead of investing directly, the investors particularly, small

investors may go for indirect investment because they may not be in a position to undertake

fundamental and technical analysis before they decide about their investment options. Their

empirical study showed that majority of the investors of mutual funds is also belongs to

equities who give the first preference to that avenue which gives good return. From the study,

concluded that lack of knowledge as the primary reason for not investing in investment


An empirical study on investors preference between equity and debt

15) S.

Gupta, P. Chawla and S. Harkant (2011) stated financial markets are constantly becoming

more efficient providing more promising solutions to the investors. Study also proved that

occupation of the investor is not affected in investment decision. The most preferred

investment avenue is insurance with least equity market. The study also argued that return on

investment and safeties are the most preferred attributes for the investment decision instead of


16) S.

Saravanakumar, S. Gunasekaran and R. Aarthy (2011) showed the upswing in capital market

allows the investors to harvest handsome return in their investments, but day-trader in stock

market hard to take advantage in bullish and bearish market conditions by holding long or

short positions. Now the derivative instruments offer them to hedge against the adverse

conditions in the stock market. They argued that secondary market is the most preferred than

primary market and cash market is the most preferred market than derivatives market because

of high risk when derivatives market is preferred than cash market for higher return.

17) Bha

t Abass Mohd, Dar Ahmad Fayaz (2013) studied the role of emotions in individual investment

behavior describe and conduct a research on what factors, investing characteristics, and

decision-making processes affected individual investors and analyzed the emotional factors

that are in the back of an investor when he makes an investment decision

18) It is

said that people save for future contingencies and would like to see their savings grow. In

An empirical study on investors preference between equity and debt

order to fulfill the objective people look forward for different investment avenues. A

behavioral finance perspective or school, which is made from psychological and financial

integration, believes that psychology plays an important role in financial decision. Since

cognitive errors and distortions impact investments' theories, therefore, they will also

influence financial options. (Kumaran Sunitha 2013) Investors do not act wisely in taking

decisions relating to investment. They have certain weaknesses like cognitive and emotional

which take a predominating role in taking investment decision of individuals. They have

behavioral biases in the event of taking investment decision.(Harikant Dr. D & Pragathi B) It

is seemingly necessary for the market makers to understand the behavior of such investors in

selecting an investment option.

19) Pan

da (1980) has studied the role of stock exchanges in India before and after independence. The

study reveals that listed stocks covered four-fifths of the joint stock sector companies.

Investment in securities was no longer the monopoly of any particular class or of a small

group of people. It attracted the attention of a large number of 24 small and middle class

individuals. It was observed that a large proportion of savings went in the first instance into

purchase of securities already issued.

20) The

financing choice (equity vs. debt) model (Hart and Moore, 1998) relies on asymmetries

information and believes that it is the result of the inability of investors to verify certain

actions or outcomes. Investors cannot earn higher returns without taking on greater risk and

the greater the risk, the greater the possibility of loss. (Harry M. Markowitz, 1952).

An empirical study on investors preference between equity and debt


Patnaik and shah (2008) has analysed on the preferences of foreign and domestic institutional

investors in Indian stock markets. Foreign and domestic institutional investors both prefer

larger, widely dispersed firms and do not chase returns. However, we and evidence of strong

differences in the behavior of foreign and domestic institutional investors.

22) Shr

otriya (2003) conducted a survey on investor preferences in which he depicted the linkage of

investment with the factor so considered while making investment. He says There are various

factors and their linkage also. These factors help us how to ensure safety, liquidity, capital

appreciation and tax benefits along with returns.

Concluding Remarks:

Most of the studies related to the present topic have been conducted by various researchers at

national and international levels. But hardly, there exist studies which focus on study of

investment avenues of equity and debt at local level. Thus there exists a gap and the need for

present study is felt.

An empirical study on investors preference between equity and debt



Primary data :

Primary data collection involved a questionnaire (Annexure) with limited and focused

questions covering questions regarding the saving/investment behaviour amongst students

working and who have just completed their graduation. The questionnaire addressed areas

such as how much (approximately) of the income is saved, whether it is put into traditional

modes of savings or into the capital markets and also questions regarding how much do social

factors like friends and family influence their choices. Around 80percent of the contacted base

shared information sufficient for inclusion into the study sample. The focus was on students

working or having an earning source and studying at the same time.These students are from

different age groups, different income levels, different qualifications. (A copy of the

questionnaire is given in the last as QUESTIONNAIRE)

An empirical study on investors preference between equity and debt

Secondary Data:

This data is collected by using the following means:

1. Investment Magazines, Business Magazines.

2. Company website

3. Data available on internet

4. Books

5. Customer database

Statistical tools and Techniques:

Certain statistical tools used to express the data and disseminate information are used in this

project so as to give a simple and indepth analysis of all the aspects of the study of the topic.

Various tools used in this project are tables, charts and pie diagrams. As they help in simple

communication of information for better understanding.


1) Na


2) Ge

nder:- Male Female

3) Ag

e group:-

An empirical study on investors preference between equity and debt

18-22 22-27 27-35

35-50 Above 50

4) Occ


Student Businessmen Retired

Self-employed Salaried

5) An

nual income:-

Below 300000 300000-600000

600000-1000000 Above 1000000

6) Wh

at percentage of income do you save?

1-10% 10-20% 20-30%

Any other specify

7) Sou

rces of investment:-

Savings Inherited amount

Money from income Personal borrowings

8) Wh

at is the purpose of your investment?

An empirical study on investors preference between equity and debt

Wealth creation Tax savings

Earn returns Future expenses

Any other specify

9) Wh

at are the factors do you give priority when you invest?

Safety High return Less risky

Liquidity Marketability

Any other specify

10) Yo

u invest in financial investment which give:-

High risk/high returns Low risk/low returns

11) Fro

m where do you gather information about the performance of capital markets?

Brokers News channels

Internet Any other specify

12) Ho

w frequently do you monitor your investment?

Daily Weekly

An empirical study on investors preference between equity and debt

Monthly Quarterly

Bi-annually Annually

13) Wh

at do you prefer between equity and debt?

Equity Debt

14) Wh

y, if equity?

Capital gains

Limited liability

Exercise control

Any other specify

15) Wh

y, if debt?


Fixed income

High returns

Any other specify

(Note: Dear Respondent, Your response to this questionnaire will be kept confidential. This

will be used for academic purposes only)

An empirical study on investors preference between equity and debt





Male 66 66

Female 34 34


18-22 42 42

22-27 22 22

27-35 12 12

35-50 16 16

An empirical study on investors preference between equity and debt

Above 50 8 8


Student 36 36

Businessmen 14 14

Self-employed 14 14

Salaried 36 36


Below 300000

300000-600000 44 44

600000-1000000 26 26

Above 100000 16 16

14 14

Percentage of Savings :

1-10% of income 42%

10-20% of income 44%

20-30% of income 14%

Source of investment :

Savings 74%

Inherited Amount 2%

An empirical study on investors preference between equity and debt

Money from Income 20%

Personal borrowings 4% Pur


of Investment:

Wealth Creation 36%

Tax Savings 12%

Earn Returns 22%

Future Expenses 30%

Factor Of Investment :

Safety 34%

High Return 28%

Less Risky 14%

Liquidity 16%

Marketability 8%

Equity Vs. Debt :

Equity Debt

56% 44%

An empirical study on investors preference between equity and debt

Why Equity is preferred ?

Capital Gains 61%

Limited Liability 28%

Exercise Control 11%

Why Debt is preferred ?

Safety 37%

Fixed Income 27%

High returns 36%

An empirical study on investors preference between equity and debt




Percentage of savings




Nearly 44% of investors save 10-20% of their total income. 42% of people save about 1-10%

and only 14% of investors save 20-30% of income. Due to ever rising inflation, people are

forced to save certain percentage of their income to meet future expenses

An empirical study on investors preference between equity and debt

Sources of investment
Factors of investment

20% 8%
16% 34% savings
2% safety
inherited amount
high return
14% 74% money from income
less risky
personal borrowings

There are

various sources

of investments as seen in figure. Majority of people invest from their savings. 20% of

investors invest from income earned whereas 4% of investors invest from borrowings. Only

2% people invest using amount inherited to them.

Purpose of investment

30% 36%
wealth creation
tax savings
earn returns
22% 12%
future expenses

An empirical study on investors preference between equity and debt

Frequently monitor the investment

8% 14%
12% daily

21% weekly
41% bi-annually

Due to the busy life, many of the investors are not able to spend time on monitoring the

investments. Only 14% of the investors are monitoring their investments daily. 21% are

monitoring on weekly basis. 41% which are in majority monitor their investment monthly.

An empirical study on investors preference between equity and debt

Only 12% of investors monitor on quarterly basis. Many of them who have invested in safe

investment avenues do not bother about their investments and monitor their investments either

bi-annually or annually.Out of the total sample of investors, only 56% of the investors invest

in equity share market whereas 44% invest in debt market. This shows that majority of

investors like to invest in equity share market.

Sources of information

8% 18%


42% news channels

32% internet Nowadays,
people are

more aware

about different

investment avenues. As seen in figure, 18% of investors take the help of the brokers. 32% of

the investors watch news channels to know about the ups and downs in capital markets. As use

of internet is growing rapidly, (42%) majority of people uses internet services. Only 8% of

investors gets knowledge about the performance of capital markets from their friends.

An empirical study on investors preference between equity and debt

Why equity is preferred?


Why debt is preferred? capital gains
61% limited liabilty
exercise control

36% 37%

fixed income
The high returns

investors who invest in equity were asked the reasons of investing in equity. So, as per the

survey, 61% of investors invest to earn capital gains and 28% of people invest in equity as the

liability of equity shareholders is limited up to the unpaid value of shares purchased by them.

Only 11% of investors prefer equity to exercise control.

An empirical study on investors preference between equity and debt

The investors preferring to invest in debt market were asked the reasons to do so. According to

the survey, it can be seen that 37% of investors invest in debt as it is safer as compared to

equity shares. Those who want to earn regular fixed income constitute only 27% of sample

investors. Nearly 36% of investors invest in debt market to earn higher returns.


1) No

wadays, people are more aware of different avenues. People like to invest in different capital


2) The

study reveals that male investors dominate the investment market in India.

3) Mo

st of the investors opt for two or more sources of information to make investment decisions.

4) Per

centage of income that they save depend on their annual income, more the income more

percentage of income they save.

An empirical study on investors preference between equity and debt

5) Mo

st of the investors get the information related to investment through internet.

6) Maj

ority of the investors are young.

7) Bus

inessmen expect higher return whereas salaried people invest to meet the future uncertainties.

8) The

study reveals that major source of investment is savings.

9) Maj

ority of investors prefer to invest in equity share market as it gives higher returns.

10) Inv

estment in equity shares limits the liability of investors up to the unpaid value of shares

purchased by them.

11) Inv

estors prefer to invest in debt as it is safe and provides regular fixed income.

12) The

old age people who need regular income prefer to invest in debt market.

13) De

bt market is also beneficial on the insolvency of the firm.


An empirical study on investors preference between equity and debt



1) SEBI should play a greater role in

supporting equity market because nowadays equity markets are increasing rapidly and it plays

a major role in securities market.

2) In todays scenario, more number of

people are showing their interest in equity market as it gives high return by bearing risk.

3) Speculations should be discouraged

because it affects market conditions badly and new investors are reducing their interest in the


4) SEBI should conduct seminars to educate

the individual investors.

5) People should be made aware of debt

market also which is less risky as compared to equity markets.

6) Margin limit by brokers should be

reduced as more and more people fall in the trap. They buy more shares and if the share prices

fall loses their hard money.

7) Apart from Hindi, business news

channels should also be started in other languages like Gujarati, etc.

An empirical study on investors preference between equity and debt



estment is the sacrifice of certain present value for the uncertain future reward. In India,

numbers of investments avenues are available for the investors. The investor has to choose

proper Avenue among them, depending upon his specific need, risk preference and return



study concentrates on identifying investors preference towards equity and debt based on their

occupation, age etc. people with higher income prefer equity whereas people with lower

income level prefer debt.


eby it is concluded that equity investment is preferred by majority of investors as compared to

debt. The major reason to choose equity is capital gains. Debt is selected as it seems to be

safer than equity. It is revealed that people preferring debts even though are salaried as well as

educated do not like to take any risk, they want to play safe. In todays scenario, SELECTON


An empirical study on investors preference between equity and debt













dulla Yameen (2001), Capital Market Development: Maldives Monetary Authority, pp. 8-

10, available at www.cmda.gov.mv/docs/semi_cmd.pdf (2/12/2010)


eep Kumar P M and Deyanandan M N (2009), A Study on Investment Performance of Retail

Investors in the Capital Market, Acumen Marian Journal of Commerce and Management,

Vol. 2, No. 1, pp. 34-46


arup K. S. (2003), Measure for Improving Common Investor Confidence in Indian Primary

Market: A Survey", pp 1-33 Available at http://www.nseindia.com/content/ research/paper64-

pdf, (19/08/2009)


la enturk Ozer, Azize Ergeneli and Mehmet Baha Karan (2004), Financial Risk Perception

An empirical study on investors preference between equity and debt

of Investors and Finance Specialists in the Beginning of the Stabilization Period of Turkey,

pp. 1-9.


16) Na


17) Ge

nder:- Male Female

18) Ag

e group:-

18-22 22-27 27-35

35-50 Above 50

19) Occ


Student Businessmen Retired

Self-employed Salaried

20) An

nual income:-

Below 300000 300000-600000

An empirical study on investors preference between equity and debt

600000-1000000 Above 1000000

21) Wh

at percentage of income do you save?

1-10% 10-20% 20-30%

Any other specify

22) Sou

rces of investment:-

Savings Inherited amount

Money from income Personal borrowings

23) Wh

at is the purpose of your investment?

Wealth creation Tax savings

Earn returns Future expenses

Any other specify

24) Wh

at are the factors do you give priority when you invest?

Safety High return Less risky

Liquidity Marketability

Any other specify

25) Yo

u invest in financial investment which give:-

An empirical study on investors preference between equity and debt

High risk/high returns Low risk/low returns

26) Fro

m where do you gather information about the performance of capital markets?

Brokers News channels

Internet Any other specify

27) Ho

w frequently do you monitor your investment?

Daily Weekly

Monthly Quarterly

Bi-annually Annually

28) Wh

at do you prefer between equity and debt?

Equity Debt

29) Wh

y, if equity?

Capital gains

Limited liability

Exercise control

An empirical study on investors preference between equity and debt

Any other specify

30) Wh

y, if debt?


Fixed income

High returns

Any other specify

(Note: Dear Respondent, Your response to this questionnaire will be kept confidential. This

will be used for academic purposes only)