The Empirical Study Of The Impact Of Investor Sentiment On Corporate Capital Structure

In modern corporate finance, capital structure has always been a hot issue. The choice of optimal capital structure plays an important role not only on the company’s future development, but also on the stability of the financial market. In classical finance theory, scholars has proposed a plenty of theories of capital structure within the framework of rational man and efficient market hypothesis. However, efficient market hypothesis has failed to explain anomalies like the equity premium puzzle, calendar effect, acute fluctuation of stock price, ect. Thus, behavioral finance takes on the view of psychology and praxeology, trying to explain these anomalies. The emergence of behavioral finance has brought great challenges to the original framework. As an important part of behavioral finance, the research of investor sentiment thinks that people are not always rational, and that their behavior will be influenced by self-emotion. The existence of sentiment will make investor’s expectation toward future market deviate from the fundamental level, and this kind of deviation will influence the market through some mechanisms. Finally, individual deviation evolves into whole market deviation and eventually the real economy is influenced. This brings us a new perspective in studying corporate capital structure. Moreover, Chinese stock market is still in progress, so it is more vulnerable to irrational investor sentiment. As a result, studying investor sentiment and its impact on corporate capital structure has both theoretical and practical significance.To explore the impact of investor sentiment on capital structure, this paper is divided into six parts. Section1introduce the research background, research significance, theoretical basis, research method and framework. Section2reviews related literature. Section3attempts to study the impact of investor sentiment on capital structure from the theoretical view. Section4tries to measure the investor sentiment. Section5presents the empirical study and section6concludes.On the basis of theoretical analysis, this paper first forms an appropriate measurement index of investor sentiment through using principal component analysis. Then the empirical results show that investor sentiment has a significant impact on capital structure, that is, the higher the investor sentiment, the lower the capital structure. Moreover, this paper demonstrates that there are two mechanisms in which investor sentiment influence corporate capital structure, one through trade behavior, the other through trade psychology. Finally, this paper provides policy suggestions based on theoretical analysis and empirical test above. In addition to improve investor diathesis, company should take investor sentiment into consideration when making financing and investment decisions, and market regulators should be fully aware of the investor sentiment and take advantage of it when developing policies.