The Study On Impact Of Investor Sentiment To Stock Price And Corporation Investment

Classical financial theory holds that the market is efficient, investors are rational, stock prices accurately reflect its true value, thus the only determinant of stock returns is market risks. In the efficient market, managers tend to pursue maximum personal interests on the basis of certain compensation contracts and corporate governance mechanisms. However, there are a large number of abnormal phenomenon in capital markets, for example, stock premium, closed-end fund discount, IPO "hot market " phenomenon, corporate investment display lack-investment or over-investment, etc. Based on psychology and sociology, behavioral finance present that investors in market are irrational, and explain the relationship between irrational investors’ sentiment and those abnormal phenomenons. In recent years, with the emerging of behavioral finance and behavioral corporate finance, the relationship between investors’irrational sentiment and stock price and corporate financial behaviors has become a new hot subject for research.At the same time, the volatility of stock price caused by speculative bubble led to the financial crisis and economic turmoil, thus how to evade this problem have become practical issues attracting intense attention from national governments throughout the world. China’s capital market started later than western countries, so that for the emerging Chinese stock market in China’s economic transition, research on related issues is particularly important. Due to the lack of a short-selling mechanism in China’s stock market, the arbitrage mechanism in the working market theory is nonexistent. Moreover, China’s stock market is dominated by inexperienced individual investors, which means that in the emerging capital market of China, investor sentiment may play a more important role in asset pricing and corporate financial behaviors.This paper focuses on investors’sentiment, and discuss in three sides:how to measure investors’sentiment, the influence of investors’sentiment to stock price and corporate financial behaviors. The author first review and summarize the studies of three sides mentioned above, second introduces the theoretical effects of investor sentiment on stock price and corporate financial behavior, at last empirically prove the theory.The main contents of this paper are:1. What is investors’ sentiment, how to effectively measure investor sentiment?2. What is the mechanism of investors’ sentiment on the stock price?3. How does investors’ sentiment impact on corporate investment spending through asset mispricing?4. Does investors’ sentiment cause a capital mistake pricing in China’s emerging capital markets. Does business managers in the market make investment decisions in order to cater investors’ sentiment?In this paper, the conclusions are the following:1. The investors in Chinese capital market are really more irrational than those in Western markets. Chinese investors’ behavior is not only similar to the Westerns, such as irrational sentiment, herd behavior and so on, but also differ from Westerns, Chinese investors are more irrational and blind optimistic, display risk aversion and opportunism. Choosing several indexes is a better way to measure investors’ sentiment, for example, discount of closed-end fund, new open, return rate of IPO, turnover rate, etc.2. Investors’ sentiment is not independent in different period, the variation in the current period will impact itself, and the impact will continue into the next two periods. In the other side, investor sentiment has a significant positive impact on the stock price. Stock price will rise when the investor is optimistic, and reduce when the investor is sad.3. Business managers obviously tend to cater to investor sentiment. When investors are optimistic, managers in order to push the stock price rise in the future will increase business investment, when investors’ sentiment is low, investors will underestimate investment, managers in order to avoid the stock price continued to fall will decrease investment, regardless of the net investment projects yield is positive.In this paper, there may be innovations are the following: 1. The theory is expounded by building models, formulaic confirms the mechanism of investor sentiment on stock prices and corporate investments. DSSW is the main model of the relationship between investor sentiment and the stock price, the paper combined with the actual characteristics of the Chinese market to extend and discuss.2. This paper expands the sample size to up to11years. Existing studies are optional before2008, or for the data since2007, usually the length of the analysis data is about five years. This article will be doubling the sample size to increase convincing results.3. In the empirical research about the impact of investor sentiment on the stock price, this paper thought adaptive expectations model, prove that investors modify their expectations based on the deviation of reality of the stock and the expected, thus investors’sentiment affect the stock price.The study was limited to preliminary research. There is still more to be desired:1. In the theory extension, although the author get the formula of the relationship between investor sentiment and stock price, still could not compare with original formula.2. The index to measure investors’ sentiment is not consistent in the empirical part. In the part about the proven impact on investor sentiment on the stock price, investor sentiment composite indicator constructed using principal component analysis. However, in the part of the impact on investor sentiment on business investment, because there are a large number of companies in the market, which required panel data analysis methods, the choice of a single indicator that business turnover as a measure of investor sentiment for analysis, though proved significant correlation between investor sentiment and business investment.3. Empirical part is short of comprehensiveness and thoroughness, the industry as the representative for analysis, if thinking about more factors in further analysis, we may get a more comprehensive conclusion.