Can Corporate Governance Mitigate the Adverse Impact of Investor Sentiment on Corporate Investment Decisions? Evidence from Taiwan

Abstract

This paper explores whether investor sentiment has an adverse impact on corporate investment decisions and whether such impact, if present, can be effectively mitigated by sound corporate governance mechanisms. The sample comprises listed firms in Taiwan between 2003 and 2010. Empirical results indicate that investor sentiment is significantly and positively related to amount of new investment and over-investment. Investor sentiment has an adverse impact on corporate investment decisions. Further test for the moderating effect of corporate governance confirms that corporate governance mechanisms can mitigate such adverse impact of investor sentiment on corporate investment decisions. The empirical results support the argument of previous literature that corporate governance has both incentive and monitoring effects on managers’ decision-making. Due to the agency problem, managers’ investment decisions may be affected by investor sentiment and deviate from the goal of maximizing firm value. Therefore, firms should reinforce their corporate governance mechanisms to minimize the adverse impact of investor sentiment.