Asset Pricing In Stock Market Considering Investor Sentiment And Managerial Overconfidence

Investors as the trading subject of the stock market,their optimistic and pessimistic investor sentiment,on the one hand,may directly affect the stock market price through trading behavior,and then have an important impact on the asset pricing of the stock market.On the other hand,they may also affect the operating fundamentals of listed companies through the earnings management and other decision-making behaviors of the managers of listed companies,and then indirectly affect the asset pricing of the stock market.The managers of listed companies as the decision-making subject of company operation,their overconfidence psychological preference will inevitably affect the company’s operating fundamentals through operating behaviors such as earnings management and investment decision-making,and then play an important role in the asset pricing of the stock market.The impact of investor sentiment and managerial overconfidence on asset pricing in the stock market has become a hot issue in the field of behavioral finance,which has been widely concerned by stock market regulators,listed companies,investors and researchers all over the world.In depth study of the impact of investor sentiment and managerial overconfidence preference on asset pricing in China’s stock market and its transmission mechanism can not only clarify the internal relationship between investor sentiment and managerial overconfidence preference and asset pricing in the stock market,but also optimize the relevant system for China’s securities regulatory authorities,and provide theoretical guidance and decision-making reference for the listed companies to standardize the management decision-making behavior of managers,which has more pertinence and practical significance.Based on the perspective of behavioral finance,this paper studies the impact of investor sentiment and managerial overconfidence on asset pricing in China’s stock market by adopting the combination of theory and empirical methods.The main research contents and conclusions are as follows.Firstly,based on the recursive function of investor’s optimal value of utility proposed by Epstein and Zin,this paper sets risk aversion coefficient as monotonic decline function of investor sentiment to construct an asset pricing model considering consumption and investor sentiment factors in theory.Then the data of A-share listed companies in China,as well as the data of consumption and investor sentiment is selected to empirically test and comparatively analyze the models considering investor sentiment and consumption factors,CAPM,Fama-French three-factor model and fivefactor model,respectively.The results show that(1)The introduction of investor sentiment and consumption factors in asset pricing model can rationally modify and expand CAPM,Fama-French three-factor and five-factor models in theory.(2)In terms of overall pricing efficiency,using investor sentiment and consumption factors to replace the scale and book-to-market ratio factors in the Fama-French three-factor model,and the profit and investment factors in the Fama-French five-factor model,respectively,can improve asset pricing efficiency;Considering investor sentiment and consumption factors,the profit and investment factors in Fama-French five-factor model can no longer improve the efficiency of asset pricing.Secondly,based on catering theory,this paper empirically studies the impact of investor sentiment on asset pricing in the stock market by driving the earnings management behavior of managers.The results show that(1)Optimistic(pessimistic)investor sentiment pushes up(pulls down)stock returns;The net effect of positive and negative accrual earnings management as well as real earnings management has a significant negative impact on stock returns in the process of catering to investor sentiment.(2)Optimistic investor sentiment improves stock returns and promotes managers’ positive accrued earnings management behavior,which leads to a significant negative impact of positive accrued earnings management on stock returns.(3)Pessimistic investor sentiment reduces stock returns and promotes managers’ negative real earnings management behavior,which leads to a significant negative impact of negative real earnings management on stock returns.Thirdly,based on the internal relationship between managers’ overconfidence psychological preference and earnings management behavior,this paper empirically studies the mediating effect of earnings management in the impact of managerial overconfidence on asset pricing,which expounds the transmission mechanism and path of managerial overconfidence psychological preference on asset pricing in stock market through earnings management.The results show that.(1)Managerial overconfidence promotes the degrees of accrual earnings management and real earnings management,and then the degrees of accrual earnings management and real earnings management have a significant negative impact on stock returns.(2)Managerial power concentration strengthens the positive impact of managerial overconfidence on the degrees of accrual earnings management and real earnings management,which further aggravates the negative impact of the degrees of accrual earnings management and real earnings management on stock returns.(3)High-quality internal control inhibits the positive impact of managerial overconfidence on the degree of accrual earnings management,which further weakens the negative impact of the degree of accrual earnings management on stock returns.(4)High-quality audit and the increase in institutional investor shareholding inhibit the positive impact of managerial overconfidence on the degrees of accrual earnings management and real earnings management,which further weakens the negative impact of the degrees of accrual earnings management and real earnings management on stock returns.Fourthly,on the basis of in-depth analysis for the internal relationship among managerial overconfidence preference,investment decision-making behavior and asset pricing in the stock market,this paper empirically studies the transmission path of managerial overconfidence affecting asset pricing in stock market through corporate investment,and the possible moderating effects of financing cash flow and market competition.The results show that(1)The stock returns of corporates managed by overconfident managers is significantly lower than the counterparts of corporates managed by non-overconfident managers.(2)The increase of financing cash flow(including equity financing cash flow and debt financing cash flow)leads to lower stock returns by strengthening the overinvestment decision-making behavior of overconfident managers.(3)Market competition plays a moderating role in the transmission path of managerial overconfidence affecting stock returns through corporate investment by affecting the relationship between corporate investment behavior and stock returns.The moderating effect of market competition has heterogeneity for corporates in different life cycles such as initial,growth,maturity and recession periods.Fifthly,this paper puts investor sentiment,managerial overconfidence and asset pricing in stock market into the same analysis framework,and empirically studies the comprehensive impact of investor sentiment and manager overconfidence on stock market asset pricing,as well as the moderating effect of investor sentiment in the transmission path of managerial overconfidence on earnings management or corporate investment on stock returns.The results show that(1)Investor sentiment strengthens the negative impact of managerial overconfidence on stock returns.(2)Investor sentiment has a significant negative impact on stock returns by strengthening the promotion effect of managerial overconfidence on the degree of earnings management(including accrued earnings management and real earnings management).(3)In the case of overinvestment,investor sentiment drives overconfident managers to further exacerbate corporate overinvestment,and then further reduces stock returns.The innovations of this paper are reflected in the following aspects.First,this paper sets the risk aversion coefficient as the monotonic decreasing function of investor sentiment based on the recursive function of investor’s optimal value of utility proposed by Epstein and Zin,and constructs an asset pricing theoretical model considering investor sentiment and consumption with pricing efficiency better than Fama-French model,and makes the empirical test by using the data of Chinese A-share listed companies,consumption and investor sentiment.The results of this paper reasonably modify and expand the Fama-French model,and enrich and improve the asset pricing theory to a certain extent.Secondly,this paper examines the impact of investor sentiment and managerial overconfidence on asset pricing in the stock market from the mediating effect perspectives of earnings management and corporate investment respectively,and expounds the transmission path of investor sentiment and managerial overconfidence affecting asset pricing through earnings management and corporate investment,and the moderating role of financing cash flow and market competition in the impact of managerial overconfidence on asset pricing through corporate investment,which is a useful supplement to the relevant research results in the field of asset pricing.Thirdly,this paper puts investor sentiment and managerial overconfidence into the same analytical framework to study their comprehensive impact on asset pricing in the stock market,and expounds the negative moderating effect of investor sentiment on the impact of managerial overconfidence on asset pricing in the stock market,as well as the moderating effect of investor sentiment on the impact of managerial overconfidence on asset pricing in the stock market through earnings management and corporate investment,which enriches the research results of asset pricing in the stock market from the perspectives of dual behavior of investor and manager.