Investor Sentiment And Stock Return

We find "chase-sell" in the stock market of China,"chase-sell" is the behavior that the investors would buy more stocks when the price rises. It is very difficult to explain by traditional finance. Behavioral finance theory holds that investors are bounded rational. Emotion, psychological factors will affect the investors’ behavior. Investor sentiment is an important factor which reflects investor psychology. The changes of investor’s sentiment can explain stock returns.Both rational and irrational factors can affect investor sentiment. With the perfection of stock market and the rising power of the institutional investors, more rational factors impact on investor sentiment. Basic situation of corporate governance is an important part ofrational factors. It will have an important influence on investors’ expectations and judgments.The findings of a2002Mckinsey survey concluded that institutional investors would pay a premium for stock offered by well-governed companies, especially in developing markets. The premium of Asian Investor would pay for well-governed companies was20%, while Chinese investors would pay25%. This shows that investors are beginning to pay attention to the quality of corporate governance. Investors are willing to pay substantial premium for well-governed companies. Higher standards of company governance will enable the company to get more cash flow and reduce the negative impact of the company’s future. When undertaking administrative decision-making analysis, investors want to consider the corporate governance.Corporate governance includes internal and external mechanism. The internal mechanism mainly refers to the board of directors, ownership structure, management compensation, the company’s financial information disclosure system and so on. External mechanism mainly refers to the control over market for corporate control, fundamentals of law, degree of competition in product markets. The impact of external mechanism is difficult to quantify. So we chose the internal corporate governance mechanisms to measure the level of corporate governance. Factors influencing corporate governance can be various and complicated, so we construct a corporate governance quality index. Then the paper studies the effect of the index and single corporate governance variables on investor sentiment.Chinese scholars have concentrated on the three aspects of the relationship among corporate governance and corporate value, corporate governance and the performance of corporate, corporate governance and earnings management. However, rare research focuses on the value from the perspective of investors. The study also takes the advantage of panel model to test the impact of corporate governance on investor sentiment, the relationships between investor sentiment and stock returns, as well as whether there are differences in the quality of corporate governanceThe data come from the CCER database and the RESSET database, and which are from2004to2012. We use principal component analysis to construct the investor sentiment index which includes turnover rate, the stock-holding of institutional investors, the growth rate of gross operating income, book-to-market ratio. And then we use the same method to construct the corporate governance index which includes the proportion of the first shareholder, the proportion of the second to the tenth largest shareholder, the proportion of the independent directors the proportion of management shareholder, the number of board meeting, the nature of the ultimate controller. We introduce the debt ratio, company size, or to list on other boards, the nature of the ultimate controller, the Beta, industry and year as a control variable in model two. We introduce the debt ratio, the return on assets, the ratio of cash holdings, company size, the nature of the ultimate controller, industry and year as a control variable in model three. Then we go to verify the hypothesis.The paper reads as follows:The first part is the introduction part of this paper. Based on the conclusion that corporate governance can improve company’s value, and investor sentiment can affect stock returns, the paper put forward the topic by supposing that corporate governance in China has reached a key point of governance effectiveness and the price of a stock can be influenced by investor sentiment. The first part elaborates this topic’s research background, theory significance and application value.The second part reviews the relevant literatures of domestic and foreign scholars, the research is divided into two categories:the effect of corporate governance on firm value, the effect of investor sentiment on stock returns.The third part is theory foundation and the proposal of the hypothesis. This paper uses behavioral finance as the basic theory, and studies that how the investor sentiment affects stock returns. Then we introduce the theory of corporate governance as the basic theory to reflect on analysis the mechanism of corporate governance how to affect investor sentiment. Finally, according to the existing research, three hypotheses are proposed in this paper.The fourth part is the construction of investor sentiment index and corporate governance index. We use principal component analysis to construct the investor sentiment index which includes turnover rate, the stock-holding of institutional investors, the growth rate of gross operating income, book-to-market ratio. And then we use the same method to construct the corporate governance index which includes the proportion of the first shareholder, the proportion of the second to the tenth largest shareholder, the proportion of the independent directors, the proportion of management shareholder, the number of board meeting, the nature of the ultimate controller.The fifth part is the design of empirical research and the conclusion of analysis. The design of empirical research includes the establishment of model, the explanation of variables and the design of study. This study is based on9208samples. The paper gives s descriptive statistics and correlation analysis. Then, regression is performed to test our hypothesis. Finally, the experimental results are explained and discussed economically.The sixth part is research findings and policy recommendations.This paper reaches the following conclusion:(1)The more optimistic the investor sentiment is, the higher current stock earnings are.(2)The overall level of corporate governance in China’s listing corporation has a rising trend, but still in a low level and so polarized.(3)Well-governed companies are the security of investors’future earnings and improve the level of safety investment. It can enhance and maintain the investor optimism to a certain extent, and enable investors to obtain higher return on investment. We confirm the existence of corporate governance premium, revealing the mechanism of corporate governance premium.(4) No matter how the quality of corporate governance is, the more optimistic the investor sentiment is, the higher current stock earnings are. However, the influence of investor sentiment on the next stock return is significantly negative and is different with the level of corporate governance. The reason may be that our investors can distinguish the level of corporate governance on a certain extent.To sum up, this paper is important in theory and in practice as follows:(1)This paper reveals the mechanism that corporate governance affects investor sentiment. We can use the corporate governance to avoid radical change in investor sentiment, which is significant in the maintenance of financial markets’stability.(2) By maintaining and enhancing investors’ optimistic emotion, the improvement of corporate governance’s quality can gain excess returns. It not only proves the existence of corporate governance premium, but reveals the mechanism and route of it. This study proves a theoretical significance in the richness and depth of the research on corporate governance.