ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Impact of Investor Sentiment on the Short－Term Investment Decision：Focusing on Operating Expenses

  • Kwak, Young－Min University of Ulsan
  • Won－Ju Choi Pusan National University

Asian Tax Journal Vol. 24 No. 6 (2023), pp. 133-161

Abstract

This paper investigates the association between investor sentiment and short－term investment expenditures related to corporate operations in Korea, utilizing a sample of 4,779 firm－years spanning from 2011 to 2019. Investor sentiment at the individual firm level is estimated using the methodology proposed by Ryu et al.(2018), while short－term investment expenditures related to operations are measured based on selling and administrative expenses in the comprehensive income statement. The analysis yields the following key findings：First, managers tend to expand research and development(R&D) and advertising investments to cater to investors’ tendency to overvalue the company’s investment opportunities during periods of optimistic investor sentiment. Conversely, expenditures in other selling and administrative expense categories show a tendency to decrease during the same periods. These results suggest that managerial decision－making regarding the increase or decrease of short－term investment expenditures, recognized as operating expenses, takes into account the investor sentiment formed within the company. In this process, it is implied that the economic implications of each component of operating expenses and catering policies for meeting investors’ profit expectations are considered, resulting in discriminatory decision－making behaviors for each component of operating expenses. Furthermore, these verification results are observed not only in estimations using annual data but also in quarterly data analysis, considering the volatility of investor sentiment throughout the year. The elasticity model verification, using variables for the volatility of investor sentiment and operating expenses, also reaffirms these results. These results empirically confirm that the catering theory presented in behavioral finance is applicable not only to long－term capital investment decisions but also to short－term investment decision－making included in operating expenses.

Keywords

  • investor sentiment
  • short－term investment expenditures
  • operating expenses
  • catering theory

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