Indian equity market has grown substantially in terms of market capitalization, trading volume, and participants among others. It has also emerged as a significant determining factor of the pace and pattern of economic growth. Given this backdrop, the thesis aims to throw light on three specific aspects related to equity market in India The three specific objectives of the study are (i) to examine the relationship between credit risk and stock return; (ii) to ascertain the role of investor attention in determining stock prices and return; and (iii) to determine the influence of risk factors on investment decision of individual investors. The thesis relies on data collected from various sources, viz., ProwessIQ (managed by the Centre for Monitoring Indian Economy (CMIE)), Google Trends, Association of Mutual Funds in India (AMFI), Economic Policy Uncertainty (EPU), and Fama French and Momentum Factors: Data Library for Indian Market.


Our findings, with regard to the first objective, suggest that credit risk has a negative and significant effect on stock returns and thus confirm the presence of distress anomaly in Indian stock market. Our further investigation into its possible explanations results that the anomaly is caused partly by the rational behaviour of the investors (referred in the literature as rational pricing explanation) and partly by the sentiment driven trade (referred in the literature as behavioural explanation). Further, we observe that the enactment of the Insolvency and Bankruptcy Code (IBC) has not altered the anomalous relation. Empirical analysis examining the relation between investor attention and returns (second objective) confirms that the investor attention has a significant effect on stock returns. Consequently, we propose investor attention-augmented asset pricing model, which is also observed to outperform the traditional asset pricing models in explaining the returns behaviour. To draw inference about the risk factors that individual investors consider for their investment decision making (third objective), we examine the behaviour of mutual fund investors in India. Our results, examining the sensitivity of mutual fund flows to alternative performance measures, suggest that the Indian investors make investment decisions on the basis of naive measure. In other words, when choosing between alternative investment options, mutual fund investors do not seem to adjust for the returns associated with the risk factors widely documented in the literature. Moreover, although uncertainty is observed to have a negative effect on fund flows, it does not have any significant influence on flow-performance sensitivity.