Can Sentiment-Induced Noise in Stock Price Promote Corporate Investment? Evidence from China's Stock Markets

HUANG Bo; JIANG Hua-dong

Volume 36 Issue 6

Nov. 2021

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Article Navigation > Journal of Guangdong University of Finance & Economics > 2021 > 36(6): 79-97

HUANG Bo, JIANG Hua-dong. Can Sentiment-Induced Noise in Stock Price Promote Corporate Investment? Evidence from China's Stock Markets[J]. Journal of Guangdong University of Finance & Economics, 2021, 36(6): 79-97.

Citation:

HUANG Bo, JIANG Hua-dong. Can Sentiment-Induced Noise in Stock Price Promote Corporate Investment? Evidence from China's Stock Markets[J]. Journal of Guangdong University of Finance & Economics, 2021, 36(6): 79-97.

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Can Sentiment-Induced Noise in Stock Price Promote Corporate Investment? Evidence from China's Stock Markets

Shanghai Lixin University of Accounting and Finance, Shanghai 201209, China

Received Date: 2021-07-08
Available Online: 2021-12-16
Publish Date: 2021-11-28

Abstract

Abstract

The noises in stock price induced by market sentiment not only increase uncertainty and decrease corporate investment directly (Uncertainty Chanel), but also hinder the managers from learning the stock price and weaken the sensitivity of "investment-valuation" (Information Channel). On the other hand, rational managers can also take advantage of the mispricing of sentiment-induced noise to increase financing and investment, and strengthen the sensitivity of "investment-valuation" (Financing Channel). Using the data of China's non-financial A-share listed companies from 2003 to 2019, taking sensitivity of idiosyncratic volatility to extreme market sentiment to measure sentiment-induced noises and controlling traditional information contents indicators and other variables, the empirical tests confirm the Uncertainty Chanel and Financing Channel above. This effect verified in the tests only exists in the post crisis era and among companies which are opaque and easy to value and arbitrage. In general, though managers tend to be conservative when faced with uncertainty caused by sentiment-induced noise, they will intentionally create this noise and use the corresponding mispricing to promote financing and corporate investment.
- sentiment-induced noise,
- noise transaction,
- stock price informativeness,
- investment-valuation sensitivity,
- China's A-share market,
- corporate investment,
- trait information

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