Investor Psychology and Security Market Under- and Overreactions

Based on the unique city‐level politician turnover data between 1999 and 2012 in China, we document that the number of IPOs at the city level decreases during the city‐level politician turnover period. Such negative shock is more pronounced for non‐state‐owned enterprises (NSOEs) than for SOEs and more pronounced for local SOEs than for central SOEs. Higher political uncertainties amplify the negative shock when the successor politician is nonlocal, when turnover occurs during periods of higher local fiscal deficits or during party member election periods, and when government interventions are higher or confidence‐in‐court is lower. Consequently, IPO firms listed during a political turnover period underperform their counterparts.

City-level political uncertainty and city-level IPO activities

Purpose: Investor sentiment, the willingness of market participants to invest, is a difficult concept to measure. Exploring the relationship between investor sentiment and stock returns can reveal how investor sentiment affects the operation of the stock market. Such an understanding can assist market participants to make more rational investment decisions based on market laws. Methodology: Although the E-GARCH model has the advantage of considering volatility clustering, it has not previously been used to investigate the impact of investor sentiment changes on the Shanghai Composite Index's market return. This research therefore applies the E-GARCH approach to data from 2013 to 2016, to explore the influence of investor sentiment on the return rate of the Shanghai Composite Index. Main Findings: There is a positive relationship between the market yield and changes in investor sentiment: when investor sentiment is optimistic the market yield tends to increase. However, the asymmetric effect coefficient in the E-GARCH model is significantly less than 0, with negative shocks having more impact on the market return than positive shocks. This indicates that there is a leverage effect in the market over the entire period from 2013 to 2016. Results: The meaning of a negative asymmetric effect coefficient is that, in comparing an increase in investor sentiment versus an equally-sized decrease, the sentiment increase had less effect on the market rate of return before a stock market crash than the decrease had after a crash. Application: Based on these research results, this article can provide insights to understand how investors’ subjective judgments on future earnings affect their investment behavior and have a great impact on the market. It also can help investors make more rational investment decisions based on an understanding of market laws, and help regulators with guidance for their supervision and policy making. Originality/Value: This paper contributes to the theory of investor sentiment index, improving the index construction method by adding two sentiment proxy indicators, investor activity ACT and stock market leverage level. After constructing the sentiment index and comparing it with the stock market index (Shanghai Composite Index), the fit is found to improve.

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Using E-GARCH to Analyze the Impact of Investor Sentiment on Stock Returns Near Stock Market Crashes

In this study, the impact of business and financial information integration (BFII) on the voluntary management earnings forecasts (VMEFs) of listed firms in China between 2008 and 2018 is investigated. Drawing on litigation cost and ability signaling theories, we find that the adoption of BFII encourages top managers to disclose VMEFs. BFII firms are identified through the textual analysis of management discussion and analysis (MD&A) reports, and the empirical results indicate that BFII firms have a higher probability and frequency of issuing VMEFs than non-BFII firms. The results remain robust after we identify causality by applying a propensity score matching and difference-in-differences (PSM-DID) test and use an alternate measure of BFII. Further tests show that BFII firms issue more accurate VMEFs and are able to issue them at an earlier stage. We also find that the positive relationship between BFII and VMEFs is weakened if the media expresses concern about the uncertainty of BFII adoption.

Business and financial information integration and voluntary management earnings forecasts

Financial statement literacy is vital in helping individuals make good longterm stock investment decisions and is especially relevant in China where individual investors account for 85 per cent of stock market activity. To delve more into this issue, we examine relevant literature on individual investor behaviour, financial literacy and investment analysis respectively. We note an overall lack of financial literacy studies in China. Furthermore, financial statement literacy has received limited attention in all three streams of literature. This is possibly due to the lack of a systematic model for measuring financial statement literacy. Indeed, current studies tend to rely on secondary data and financial statement literacy is measured in a limited manner. We therefore propose a model in which financial statement literacy is evaluated through three dimensions, namely knowledge, attitudes and behaviour. The model can be extended to examine the influence of financial statement literacy on stock investment decision-making.

Financial Statement Literacy of Individual Investors in China

The IPO process is a way for companies to improve their corporate governance and for investors to assess company quality This paper posits that investor choices vary with differences in investment ability and experience Three groups of investors with large holdings, namely individual investors, blue-chip institutional investors and underperforming institutional investors, are compared by their use of three types of corporate governance information: board characteristics, equity structure and affiliated relationships Overall, institutional investors make greater use of corporate governance information than individual investors, with blue-chip institutional investors making the greatest use Further, bull-bear markets exert a significant influence on the behavior of both individual and underperforming institutional investors These results enrich the IPO literature and contribute to optimal social fund allocation in the stock market

https://www.econstor.eu/bitstream/10419/187661/1/1-s2.0-S1755309116300247-main.pdf

Xiaohong Dong

Papers

Are all investment decisions to subscribe to new stocks mindless?: Investor heterogeneity and behavior in the process of subscribing to new stocks