Investor sentiment, asset returns and firm characteristics: Evidence from the Korean Stock Market

ABSTRACT

This study investigates the effects of investor sentiment on asset returns with respect to firm characteristics. By analysing a unique stock trading dataset of the Korean Stock Market that contains rich information on investor types and sentiment, we confirm that high investor sentiment induces higher stock market returns. The positive association between investor sentiment and stock returns is highly significant after controlling for trading behaviours, other risk factors and firm characteristics. Interestingly, investor sentiment has stronger effects on small firm, low-priced, high book-to-market ratio, high excess return, and highly volatile stocks, and stocks heavily traded by individual investors. The diverse degree and intensity of the sentiment effect across stocks with different firm characteristics is possibly attributable to individual investor’s trading.

KEYWORDS:

• Firm characteristics
• investor sentiment
• individual investors
• Korean Stock Market
• trading behaviour

JEL CLASSIFICATIONS:

• G12
• G14
• G15

Acknowledgement

This paper was supported by Sungkyun Research Fund, Sungkyunkwan University, 2016.

Notes

1. Changing the values of K and M does not alter the conclusions of our study.

2. The market risk factors are considered when estimating investor sentiment (Sentiment_i,t) and investor trading behavior (BSI_i,t), as indicated in regression equations (6) and (8), respectively. We perform the regression analyses to eliminate the possible effects of the common market excess return component (Market_t). As we use the residuals from the regression analyses, which are defined as Sentiment_i,t in equation (6) and BSI_i,t in equation (8), the market factors are indirectly controlled for.

3. These apply to all the remaining tables.