Investor Sentiment and Distorted Investment of Chinese Listed Companies

With an unbalanced panel data set of A-share listed firms over the period of 1998-2006, we use the closed-end fund discount, turnover and average first-day returns on IPO as proxies for investor sentiment to analyze the relationship between investor sentiment and investment behavior. We find the following results: (1)in China, investor sentiment has a positive impact on corporate investment scale and this hypothesis is more relevant in firms with financial constraint; (2)when pessimistic investor sentiment takes place, the listed firms are likely to under invest and when optimistic, the listed firms are likely to overinvest; (3)investor sentiment is more sensitive in bull markets, which becomes more pronounced in the subsample of the firms with financial constraint.