Market Sentiment, Valuation Heterogeneity, and Corporate Investment: Evidence from China’s A-Share Stock Market

Bo Huang and Xi Fang

Emerging Markets Finance and Trade, 2021, vol. 57, issue 8, 2230-2245

Abstract: We study the heterogeneous valuation of Chinese A-share stocks caused by high or low market sentiment and its impact on corporate investment during 2005Q3–2015Q2. We divide stocks into three types based on sentiment betas. We find that for “speculative” (and “bond-like”) stocks, overvaluation from high (low) sentiment increases corporate investment, but undervaluation from low (high) sentiment can be arbitraged away; “investment-Q” sensitivity is relatively weak. For “rationally valued” stocks, corporate investment is positively correlated with valuation and has no consistent relationship with market sentiment. However, changes in market sentiment can reduce the reliance of managers’ investment decisions on valuation.

Date: 2021
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DOI: 10.1080/1540496X.2019.1672531

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