Investor Sentiment and Price Discrepancies between Common and Preferred Stocks in Korea

Heejin Yang,Doowon Ryu

doi:10.3390/su13105539

Abstract

We examine whether investor sentiment affects price discrepancies between preferred and common stocks, based on a sample of Korean firms that issue preferred stocks. While most research has focused on corporate finance features such as voting rights, we examine price discrepancies as a behavioral finance feature from a new perspective. Based on the investor sentiment index, as investor sentiment increases, price discrepancies between preferred and common stocks widen in the KOSPI market. These findings confirm that investor sentiment—not merely voting premiums, cash flow rights, and liquidity—is a significant factor in explaining price discrepancies between preferred and common stocks in Korea.

Highlights

Different types of stock issued by the same firms in the same stock market have been used as valuable tools by many researchers demonstrating evidence related to agency problems, ownership, voting right or premiums, and private benefits in the finance field [1,2,3,4].the price discrepancies of dual-class shares are regarded as the value of the voting premium [5,6]
We examine whether investor sentiment can be a significant factor in explaining price discrepancies between different stock types issued by the same company in Korea, even after controlling the effects of voting premium, liquidity, and other corporate finance factors
We found the interesting result that price discrepancies are: (i) lower when the difference in liquidity (∆volume differential (Volume)) is higher, consistent with a significant trading volume decrease with the market over-reacting; (ii) higher when the difference in (∆Outstanding) is higher, indicating that a large number of shares are in the open market that collect voting rights through market transactions, decreasing price discrepancies; (iii) lower when firm size (Size) is higher, indicating higher voting premiums when the size of the private benefits is larger; and (iv) higher when leverage (Lev) is higher, consistent with bankruptcy costs increasing the value of safe securities that have a senior right

Summary

Introduction

Different types of stock issued by the same firms in the same stock market have been used as valuable tools by many researchers demonstrating evidence related to agency problems (costs), ownership, voting right or premiums, and private benefits in the finance field [1,2,3,4]. Private benefits, and agency costs can explain a large part of price discrepancies between different types of stock issued by the same company, an unexplained part remains. Many studies on behavioral finance have suggested that investor sentiment can be a pricing factor [8,9,10,11] To follow this trend, we examine whether investor sentiment can be a significant factor in explaining price discrepancies between different stock types issued by the same company in Korea, even after controlling the effects of voting premium, liquidity, and other corporate finance factors. We empirically demonstrate, using daily data, that investor sentiment can help explain part of the price discrepancies between preferred and common stocks in Korea.

Preferred Stocks in Korea and Price Discrepancies

Data and Methods

Empirical Results

Conclusions and Suggestions