A Study on the Relationship between Investor Sentiment and Corporate Investment-Evidence from China

The question about whether investor sentiment correlates with their corporate investment is often examined in the literature. Thus, based on behavioral finance theory, this paper aims to investigate whether investor sentiment in stock market has an impact on corporate investment in listed Chinese firms, where the mutual fund flows is taken as the proxy variable of investor sentiment for stocks. We utilize the database of China Stock Market as the origin of data sources and collect data of the mutual fund flows and corporate investment as the sample from the first quarter of 2007 to the fourth quarter of 2011. Then, we document a significant positive relationship between investor sentiment and corporate investment by using a proxy for investor sentiment. Further, the coefficient of investment-sentiment sensitivity is employed to divide portfolios. Consequently, the empirical evidence shows that investor sentiment sensitivities change differently across the level of firm investment. In terms of corporate investment, small firms show relatively higher sentiment sensitivity than large firms. Besides, the portfolios indicate that there is no significant relationship between other control variables and cross-sectional investor sentiment.