Market discipline in the behavioral finance perspective: a case of Sharia mutual funds in Indonesia

Purpose - This study aims to determine antecedents of market discipline. A model was constructed by extending the theory of planned behavior (TPB) to explore the cognitive, psychological and social factors that influence the market discipline in the form of withdrawal behavior. Design/methodology/approach - This study applied a quantitative approach by surveying 181 Indonesian retail investors in Sharia mutual funds, which were represented by civil servants. The samples were collected using the purposive sampling technique. This study used the partial least square–structural equation model to analyze the data. Findings - The results revealed that the Islamic financial literacy, the attitudes toward withdrawal, the subjective norms and the perceived behavioral control had a positive significant effect on the withdrawal intention, whereas financial risk tolerance had an insignificant impact. Then, all the exogenous variables and intention to withdraw had a significant contribution in explaining market discipline. Contrary to the proposed hypothesis, the attitude toward withdrawal had a negative impact on market discipline. The structural model indicated that the TPB could be extended by adding some exogenous variables (i.e. Islamic financial literacy and financial risk tolerance) in determining the intention to withdraw and withdrawal behavior, which indicated the market discipline in Sharia mutual funds. Research limitations/implications - This study was limited to individual investors who work as civil servants. This study did not accommodate different demographic factors such as age and gender, which influence fund withdrawal behavior. Practical implications - The government must focus on the inclusion of market discipline in Sharia mutual funds’ regulation to encourage the risk management disclosure, specifically that related to Sharia compliance. Originality/value - Previous studies applied a traditional finance theory to predict market discipline, but this study contributes to filling the theoretical gap by explaining the market discipline from a behavioral finance perspective that was found in Sharia mutual funds.