Bounded Rationality, Stock Mispricing, and Corporate Investment
Zhaohui Zhu* and Wensheng Huang**,†
*School of Accounting, Zhejiang Gongshang University
18 Xuezheng Street, Xiasha, Hangzhou, China
**Hangzhou College of Commerce, Zhejiang Gongshang University
149 Jiaogong Road, Hangzhou, China
Although the effects of agents’ bounded rationality and stock mispricing on corporate investment is becoming a frontier research field in corporate finance, little research has been devoted to different channels of managers catering to agents’ bounded rationality and stock mispricing. With a sample of 2003–2010 Chinese listed companies, we investigate how firms cater to stock mispricing in their investment decision-making. The empirical study results support the view that managers do cater to investors’ perceived bias for investment in intangible assets and/or fixed assets and that firms’ financial constraints, market characteristics, and the myopia of investors are important factors in catering for such investment. Moreover, fixed asset investment may be a more important channel than intangible asset investment for managers when catering to stock mispricing.
-  N. Barberis and R. Thaler, “A survey of behavioral finance,” Handbook of the Economics of Finance, Elsevier Science Ltd., pp. 1052-1121, 2003.
-  M. Baker and J, Wurgler, “Behavioral corporate finance: an updated survey,” National Bureau of Economic Research (NBER) Working Paper, No.17333, 2011.
-  A. Shleifer, “Inefficient Markets: An Introduction to Behavioral Finance,” Oxford University Press, 2000.
-  M. Friedman, “The case for flexible exchange rates,” Essays in Positive Economics, University of Chicago Press, pp. 157-203, 1953.
-  E. Jr. Saunders, “Stock price and the Wall Street weather,” American Economic Review, Vol.83, No.5, pp. 1337-1345, 1993.
-  M. Kamstra, L. Kramer, and M. Levi, “Winter blues: a SAD stock market cycle,” American Economic Review, Vol.93, No.1, pp. 324-343, 2003.
-  I. D. Dichev and T. D.Janes, “Lunar cycle effects in stock returns,” J. of Private Equity, No.16, pp. 8-22, 2003.
-  A. Heitham, R. Keith, and R. Timothy, “Investor sentiment and calendar anomaly effects: A case study of the impact of Ramadan on Islamic Middle Eastern markets,” Research in Int. Business and Finance, Vol.25, No.3, pp. 345-356, 2011.
-  J. You and J. Wu, “Spiral of silence: media sentiment and the asset mispricing,” Economic Research J., No.7, pp. 142-152, 2012 (in Chinese).
-  L. Shan, “Psychological or real? The effect of the Wenchuan earthquake on China’s stock market,” Economic Research J., No.4, pp. 121-133, 2011 (in Chinese).
-  M. Alpert and H. Raiffa, “A progress report on the training of probability assessors,” Judgment Under Uncertainty: Heuristics and Biases, Cambridge University Press, pp. 294-305, 1982.
-  D. Kahneman and A. Tversky, “Judgment under uncertainty: heuristics and biases,” Science, No.185, pp. 1124-1131, 1974.
-  W. Edwards, “Conservatism in human information processing,” Formal Representation of Human Judgment, Wiley, pp. 17-52, 1968.
-  M. Zouaoui, G. Nouyrigat, and F. Beer, “How does investor sentiment affect stock market crises? Evidence from panel data,” The Financial Review, No.46, pp. 723-747, 2011.
-  F. Chau, R. Deesomsak, and M. Lau, “Investor sentiment and feedback trading: evidence from the exchange-traded fund markets,” Int. Review of Financial Analysis, No.20, pp. 292-305, 2011.
-  J. Stein, “Rational capital budgeting in irrational world,” J. of Business, No.69, pp. 429-455, 1996.
-  M. Baker and J. Wurgler, “The equity share in new issues and aggregate stock returns,” J. of Finance, No.5, pp. 2219-2257, 2000.
-  M. Baker, J. Stein, and J. Wurgler, “When does the market matter? Stock prices and the investment of equity-dependent firms,” Quarterly J. of Economics, Vol.18, No.3, pp. 969-1005, 2003.
-  C. Polk and P. Sapienza, “The real effects of investor sentiment,” NBER Working Paper, No.10563, 2004.
-  C. Polk and P. Sapienza, “The stock market and corporate investment: a test of catering theory,” Review of Financial Studies, Vol.22, No.1, pp. 187 -217, 2009.
-  Z. Zhu, “The effect of investor sentiment on the listed company’s investment – a study based on catering channel,” J. of Business Economics, No.6, pp. 60-67, 2013 (in Chinese).
-  Z. Zhu, “Stock misevaluation: an analysis based on the bilateral bounded rationality,” Friends of Accounting, No.5, pp. 4-9, 2014 (in Chinese).
-  J. M. Keynes, “The General Theory of Employment, Interest and Money,” London: Macmillan, 1936.
-  M. Baker and J. Wurgler, “Market timing and capital structure,” J. of Finance, No.7, pp. 1-32, 2002.
-  S. Gilchrist, C. Himmelberg, and G. Huberman, “Do stock price bubbles influence corporate investment,” J. of Monetary Economics, No.52, pp. 805-827, 2005.
-  M. Dong, D. Hirshleifer, and S. H. Teoh, “Stock market misvalutaion and corporate investment,” MPRA Working Paper, No.3109, 2007.
-  R. Chirnko and H. Schaller, “Fundamentals, misevaluation, and business investment,” J. of Money, Credit and Banking, Vol.43, No.7, pp. 1423-1442, 2011.
-  G. Hua, Z. Liu, and Q. Xu, “Investor sentiment, managerial optimism and corporate investment,” Finance Research, No.9, pp. 178-191, 2011 (in Chinese).
-  Y. Tan and F. Xia, “Stock price and investment of listed companies in China: the research from the integration of earnings management and investors’ sentiment,” Accounting Research, No.8, pp. 30-39, 2011 (in Chinese).
-  Z. Zhu and W. Huang, “Investor sentiment and firm’s investment: an empirical study based on catering channel,” J. of Applied Sciences, Vol.13, No.8, pp.1199-1205, 2013.
-  Z. Qing, “From cognitive science to economics: internal mechanism study on emotional involvement in economic decision-making,” J. of Finance and Economics, Vol.38, No.1, pp. 72-83, 2012.
-  X. Xie, Y. Li, and Q. Tang, “Does product market recognize the value of business investment in R&D? – Empirical evidence from Shanxi listed companies,” China Accounting Review, Vol.7, No.3, pp. 299-314, 2007 (in Chinese).
-  S. N. Kaplan and L. Zingales, “Do investment-cash flow sensitivities provide useful measures of financing constraints?,” Quarterly J. of Economics, Vol.112, No.1, pp. 169-215, 1997.
-  V. Goyal and T. Yamada, “Asset price shocks, financial constraints, and investment: evidence from Japan,” J. of Business, No.77, pp. 175-199, 2004.
This article is published under a Creative Commons Attribution-NoDerivatives 4.0 International License.