The Influence of Investor Sentiment on the Chinese Financial Market

Abstract

This thesis investigates the role of investor sentiment in shaping financial market outcomes in China through three empirical chapters. The first chapter examines how investor sentiment influences IPO underpricing under China’s registration-based IPO system. Using deep learning algorithms to analyze Weibo text data, the study finds a significant positive relationship between pre-IPO investor sentiment and underpricing. The results suggest that IPO pricing reflects not only firm fundamentals but also investor optimism and speculative behavior. The second chapter explores the impact of investor sentiment on mergers and acquisitions (M&A), focusing on the post-announcement period. Investor sentiment, constructed from Weibo posts during the four-day event window, is shown to positively influence short-term abnormal returns and reduce the likelihood of deal withdrawals. These findings highlight the extent to which investor reactions shape corporate decision-making. The third chapter investigates investor green sentiment in the context of ESG mutual funds. A sentiment index based on Baidu search data reveals that stronger green sentiment leads to higher fund inflows, especially for high ESG-rated funds. However, larger inflows result in increased fund size, which negatively affects subsequent performance due to diseconomies of scale. Overall, this thesis provides new evidence on the influence of individual investor sentiment in an emerging market setting and demonstrate that investor sentiment not only affects asset pricing and fund flows but also plays a role in corporate actions such as IPO pricing and M&A decisions. This thesis provides important implications for investors, fund managers, and regulators seeking to understand and respond to sentiment-driven behaviour in China’s evolving financial markets.