Acknowledgments: We are grateful for the helpful comments from the former editor Bong-Chan Kho, the Editor Myung-Jig Kim, and anonymous referees, and are thankful to FnGuide for providing financial support and research data.
Effect of Investor Sentiment on Market Response to Stock Split Announcement*
Article first published online: 25 NOV 2010
© 2010 Korean Securities Association
Asia-Pacific Journal of Financial Studies
Volume 39, Issue 6, pages 687–719, December 2010
How to Cite
Kim, K. and Byun, J. (2010), Effect of Investor Sentiment on Market Response to Stock Split Announcement. Asia-Pacific Journal of Financial Studies, 39: 687–719. doi: 10.1111/j.2041-6156.2010.01029.x
- Issue published online: 25 NOV 2010
- Article first published online: 25 NOV 2010
- Received 22 July 2009; Accepted 27 September 2010
- Behavioral finance;
- Investor sentiment;
- Market response;
- Stock split
This paper creates monthly investor sentiment indices for Korea and provides evidence that these indices have the power to predict the subsequent 6-month buy-and-hold returns. In addition, the paper shows that investor sentiment positively affects market response to stock split announcements by using stock splits on the Korea Exchange from 1999 to 2006. First, market response to a stock split announcement is positively related to investor sentiment. Second, market response is more pronounced in high sentiment periods, particularly for small, young, highly volatile, and low profit-stocks, the valuations of which are highly subjective and difficult to arbitrage. Third, the initial effects of size, age, volatility, and profitability in times of high investor sentiment tend to be reversed over 12-month post-split performance. These empirical results imply that the market tends to overreact to stock split announcements for small, young, highly volatile, and low-profit firms in a high sentiment period but thereafter correct the overvaluation of those firms during the 12-month post-split performance. As such, the paper shows how investor sentiment affects the valuation of stocks at a corporate event level.