Investor Sentiment, Cash Holding And Corporate Investment

Thinking about the facts of the financial crisis in Southeast Asia, the worldwide spread financial crisis originated in USA in2008, and also the the downturn of the stock market caused by the European debt crisis, people have recognized the significant influence of investor sentiment. The volatility of investor sentiment can not only make the stock price deviated from the fundamental value but also make the systematic deviation exist for quite a long time. Facing the drastic changing of the outside market, companies show the different abilities to afford the external crisis because of their different internal financial conditions. The fact that companies with sufficient cash saving show stable operation conditions and performances make the circle of theory and practice pay more attention to an issue which has been ignored for a long time----the corporate cash holding.Cash is the fund temporarily exists in the company as the pattern of money which is also the most liquid asset of company. When facing the high outside financing costs and the undervalued estimation of company caused by the pessimistic investor sentiment, the daily operation and performance of company mostly based the internal fund. Under this condition, the cash holding condition would play an important role, especially in aggravating or releasing the outside shocks. If the cash saving is sufficient, then the influence of the pessimistic investor sentiment to financing, investment and so on would be released by the support of inside cash; oppositely, the lack of cash holding would make the company prone to decline the investment when facing bad outside market condition. High cash holding would magnify the increasing of investment caused by optimistic investor sentiment and low cash holding would magnify the decreasing of investment caused by pessimistic investor sentiment. So compared to low cash holding company, high cash holding company’s investmen-investor sentiment sensitivity would be higher.Based on the above analyses, we take the market level investor sentiment and the company level cash holding into account together and deeply think about the problem-how investments being influenced by the inside and outside factors. Initiated from the existing researches about the channels of how the sentiment influences investment, we analyze the different roles of cash holding in each channel in detail to see the total function of cash holding on changing the extent of the influence from sentiment to investment. We also make further tests based on the reality in our country by taking the ownership property and separation of control and cash flow right into accounts. Furthermore, tests about the influence of cash to the inefficient investment caused by sentiment which means the cash holding under different sentiment would bring financial consequences on assets allocation. Due to the different functions of cash holding to investment under different sentiment, we find that the value of cash changes with the sentiment conditions. The cash values tests proved the hypothesis that the cash value is higher during pessimistic investor sentiment period.As the thoughts above, the dissertation is constituted with seven main chapters. The first chapter is the introduction which focuses on explaining the research problems from the reality, the theoretical and realistic meaning of the research and the main constructions. The second chapter is the literature review about the investor sentiment, cash holdings and value, investment and so on to form the theoretical basic for further analyze. The third chapter is about the key theoretical derivations of basic hypotheses and further tests about the ownership property and separation of control and cash flow right and also the cash holding values. The chapter four to chapter six is the empirical tests of all the hypotheses mentioned in the third chapter and the analyses of the results with the policy proposals. The last part includes the summary of the whole dissertation, the disadvantages and further researches prospects.The main research findings can be summarized as the following four points:First, the company cash holding condition can adjust the extent of influences of investor sentiment to corporate investment. That is to say, the high cash saving may magnify the acceleration influence of optimistic sentiment to investment and the low cash saving may make the inhibitory action of pessimistic sentiment to investment to be more serious. By the same reason, the high cash saving may release the inhibitory action of pessimistic sentiment to investment and low cash saving may also trail off the influence of optimistic sentiment to investment.Second, companies’ownership property and separation of control and cash flow right may make the function of cash in adjusting the relationship between sentiment and investment change. Compared to state-owned companies, not-state-owned companies stay at the inferior status in the credit rationing, afford higher operation and financial risk which makes the requirement of cash saving to be stronger. This stronger cash holding intention makes not-state-owned companies put less money into the investment which lower the sensitivity of investment to sentiment. Secondly, separation of control and cash flow right would also make the function of cash holding to be different:the manager of companies with large separation of two rights are more likely to spend more money on investment when sentiment is high, which make the cash holding influence more on the sensitivity of investment to sentiment.Third, from the perspective of the inefficiency of investment, the tests prove that the deterioration and mitigation functions of sentiment to inefficient investment are all influenced by cash holdings. The positive relation between over-investment and sentiment increases with the cash holding rising. The negative relation between under-investment and sentiment increases with the cash reducing. It is to say, high cash holding would make the over-investment to be more serious during high sentiment, but at the same time release the extent of the influence from low sentiment to under-investment; low cash holding would make the under-investment to be more serious during low sentiment, but at the same time release the extent of the influence from high sentiment to over-investmentFinally, based on the reliance of investment and operation to cash, we analyze and test whether the cash holding value varies with the sentiment. Cash holding bring benefits and costs which make the cash holding contribution to be decided by the difference between benefits and costs. Empirical tests prove the cash value ascends during pessimistic sentiment period. Because the cost of outside financing is higher this time and the operation rely more on internal fund.The main innovative findings include the following three points. First, the existing researches about the influence of sentiment to investment ignored the internal fund conditions of different companies. This dissertation take the same outside sentiment condition and different company cash holding together to find the truth about how the investment be influenced by inside and outside factors. The state-owned condition and separation of control and cash flow right would make the influence extent of cash to be different. Second, further tests show the joint influence of sentiment and cash is also significant to the inefficiency of investment. The positive relation between over-investment and sentiment increases with the cash holding rising. On the other hand, the negative relation between under-investment and sentiment increases with the cash reducing. Third, thinking that the reliance of investment to cash varies with sentiment, the dissertation analyzes the cash holding value from the perspective of the value of cash holding to fight against the outside market shock. The tests show that the cash value is higher during low sentiment, because during this period the operation of the whole company relies more on internal fund. These tests supply a new perspective to test the value of cash holding.