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Empirical Study of the Effect of Irrational Factors on the Investment Decision of Chinese Listed Companies

Author: ZuoHongLei
Tutor: YiChuiLin
School: Nanjing University of Finance and Economics
Course: Finance
Keywords: Behavioral Finance Irrationality Investment Decision Investor Sentiment Managerial Overconfidence
CLC: F832.51;F224
Type: Master's thesis
Year: 2011
Downloads: 71
Quote: 0
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This paper studies the impact of irrational factors that come from internal managers of companies and the participants in the external market on the investment decisions of the listed companies in China,which is on the basis of the hypothesis of“limited rational investors”in the behavior finance, as well as the relative theory from classic finance .Although the economics structure of our country has been adjusting all the time, investment is still regarded as the main power to promote the development of economics. In the field of classic financial theory, the agency cost and asymmetric information has been studied to solve the problem of the existing of various investment deviations, such as overcapitalization or undercapitalization .However, there are many factors affecting investing decision. According to the definition of limited ration on participants in the financial market in the theory of behavior finance and the conception of agency cost and asymmetric information from classic finance , the paper focuses on that how these factors relevant to the limited rational investors influence the investing decision-making of listed companies in our country .Further, with the combination of several factors such as the financial constraint and investment opportunity, the irrational indexes that reflect the mood of investors and overconfidence of mangers separately have been used to study this topic deeply. We are in the hope of offer some references on the investing behavior to the investors of stock market and managers of the companies in China.This paper gives an empirical research on the sample data from the year 2005 to 2009 in Shenzhen stock market of china and get the conclusion that when financial constraint does not have an obvious influence on investment decision-making ,there is a significant negative correlation between the investment level and the indexes reflecting irrationality of investors ,that is to say ,as the external investors overestimate company’s real value, the investment on the company reduce evidently, and vice versa .It manifested that the decision-makers in the company is very rational, and they not only are not affected by the irrationality of investors, but also make full use of their irrationality to create opportunity which is favorable for such decision makers to invest in the market. In addition, compared with the irrationality of investors showed above, the one of internal managers in companies doesn’t influence decision makers significantly. Finally, it points out that the model (or mechanism) the paper has concluded is not considered as a health model, which builds on the irrational behavior of investors in the external market and would cut down their wealth constantly .Beside,the investors will reversed because of their yield is not as high as their anticipate, the economy of the whole country will fluctuate consequently. In hence, it is necessary to improve the rationality of investors in the external market with the endeavor of all the participates in the stock market, managers as well as investors.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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