Investor Sentiment And Market Responses To Listed Companies’ Violation Of Regulations

Neither investor sentiment nor the market response to listed companies’violations has been extensively studied in the Chinese A-share market. This presentthesis collects various types of violations that have been discovered and penalizedfrom1998to2011, and seeks to measure the market reactions to these violations andseveral partitions of them. Base on the measurement, we investigate whether and howinvestor sentiment affects the magnitude of market reactions.Through the standard event study of enforcement actions on violations, the thesisshows significant negative one-day and three-day abnormal returns of-0.98%and-1.28%around the announcement day for the full sample. Further study on thesubgroups of the samples divided by the type of violations, by the type of regulatorsand by the type of enforcement actions also discovers a negative impact on stockprices, except for those involving illegal stock purchases, which we believe containmore positive information than negative one. In addition, enforcement actions takenby the China Securities Regulatory Commission (CSRC) or in the form of charge andinvestigation will result in stronger decline in stock prices.In order to conduct research on the relationship between investor sentiment andthe market responses to violations, we construct an investor sentiment index for the A-share market. The index is calculated as the weighted average of the first twoprincipal components of five sentiment proxies: Closed-end funds discount, A-sharemarket turnover, numbers of companies that raise capital from the A-share market,first-day returns of IPOs, and the Consumer Confidence Index in mainland China.Applying a multivariate linear regression, we find a weak but positive correlationbetween the investor sentiment index value and the magnitude of market reactions (inabsolute value). However, when we divide our sample into halves according to themarket value, age of firm, growth of sales, EPS over book value, and three-yeardividend policy, we find that the positive correlation is statistically significant forsmall stocks, unprofitable stocks and non-dividend-paying stocks. To answer whyprices of these categories of stocks tend to decline by a larger extent when sentimentis high, we make an analysis and provide explanations from three aspects like thestock valuation, investors’ information processing, and tendency of herding behavior.The conclusion drawn through the study in this thesis has practical meanings forboth stock investors and market regulators. When sentiment is high, investors, especially those of small, unprofitable and non-dividend-paying stocks, should makegreater effort to analyse and control the risks associated with violations. In addition,market regulators should strengthen their risk-warning responsibility in highsentiment periods, in order to protect small investors from large downward pricemovements as a result of violation disclosure. In this way investors’ interest can bebetter protected and an even healthier growth of the A-share market guaranteed.