This document summarizes a study examining the impact of investor sentiment on firm downside total risk. The study uses dynamic panel estimation to analyze data from 280 non-financial Pakistani firms over multiple years. The results show that investor sentiment has a statistically significant positive effect on firm downside total risk. Additionally, the impact of investor sentiment is more pronounced for smaller firms than larger firms. In conclusion, the study finds that investor sentiment qualifies as a determinant of downside total risk.

1. Investor Sentiment and Firm
Downside Total Risk
Jennifer Joseph
FURC/FA17-MSMS-003/FUI
FACULTY OF BUSINESS AND TECHNOLOGY
FOUNDATION UNIVERSITY ISLAMABAD
Supervisor: Dr. Shahzad Hussain
Date: January 2, 2020

2. Introduction
• Empirical studies have revealed that sentiment of investors
contribute towards the measurement of returns of the stock.
• Kahneman and Tversky (2013) proposed the Prospect theory
that argues that investors are more concerned the losses as
compared to the gains while making their investment
decisions.
• Further Debata, Dash, and Mahakud (2018) scrutinized how
investor sentiment effect emerging stock exchange liquidity.
• Research studies reveal that investor sentiments have a
decisive role in stock returns.

3. Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph
Problem Statement
• The investors’ behavior of emerging markets is
irrational as compared to the behavior of the market
participants of the developed markets.
• The irrational behavior leads to undervaluation and/
or overvaluation of the securities.
• This situation might increase the investors’ exposure
toward market risk (Hussain and Shah,2017).
• The investors are more concerned towards downside
risk rather than towards upside risk.

4. Significance of the Study
• The previous literature has ascertained the effect of investor
sentiment on firm risk.
• Ur Rehman (2013) studied the effect of investor sentiments on
Total risk.
• Hussain and Shah (2017) examined the impact of investor
sentiment on the firm downside systematic risk.
• Paraboni, Righi, Viera and da Silviera (2018) used four
measures : standard deviation, value at risk, expected shortfall
and shortfall deviation risk to measure the association between
investor sentiment and risk in the US, German and Chinese
markets.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

5. Significance of the study
• Rashid and Hamid (2015) and Hogan and Warren (1974) criticized the CAPM
approach and believed that investors have less concerns regarding the upward
fluctuations and more concerns regarding the downside risk.
• Estrada (2007) explained that semi standard deviation is the measure of
downside risk and explains the cross section of return.
• Researches have argued that semi standard deviation is an appropriate
measure of downside risk.
• Therefore the study has examined the impact of investor sentiment on firm
downside risk using semi standard deviation.
• Dynamic panel estimation (GMM) was used to tackle the problem of
endogeneity.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

6. Research Questions &
Objectives
Research Question
– Does Investor Sentiment index qualify as a
determinant of Downside total risk?
Research Objective
– To examine the impact of investor sentiment index
on downside total risk.
– To examine the impact of investor sentiment across
firm size.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

7. Literature Review
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

8. Literature Review
• Estrada (2002) proposed a model for estimating the downside
beta and used the DCAPM approach instead of CAPM.
• Estrada (2007) also suggested the downside beta. The study
gave evidence for supporting downside risk measure over the
standard risk measure as the downside beta can explain the
variability of the cross section of the returns
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

9. Literature review
• H. Ahmed, Ali, and Mahmood (2012) found that investor
sentiment play a significant role in the mean variance
trade off.
• Ur Rehman (2013) found that investor sentiment has a
significant role in the volatility of the stock returns.
• Sayim and Rahman (2015) found that return of the stock
exchange increases with increase in investor sentiments
• Naik and Padhi (2016) explored that sentiment index
negatively influence volatility.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

10. Literature Review
• Yang and Zhou (2016) explored a positive relation between
the investor sentiment and excess returns.
• Baker and Wurgler (2006), Ur Rehman (2013), and Baker
and Wurgler (2007) developed investor sentiment index
using six proxy variables which are Number of Initial
Public Offerings, First day return on IPO, Dividend
Premium, Equity Share, share turnover and Close end
mutual funds discount
• Empirical studies found that the effect of the investor
sentiment is more prominent in the smaller firms (Maitra
& Dash, 2017; H. Yang et al., 2017; Seok et al., 2018)
10
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

11. Research Methodology
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

12. Theoretical Framework
Investor sentiment index
*The study also checked the impact of Investor
Sentiment across firm size .
No of IPO’s
First Day Return
on IPO
Share Turnover
Equity share
Closed end
mutual funds
Dividend
Premium
Downside Risk
Noise
Trader
Theory
 Prospect Theory
Control Variables
 Firm Size
 Dividend payout ratio
 Return on equity

13. Operationalization of Variables
• The downside total risk was measured through semi deviation
which is given by Estrada(2002)
• The impact of investor sentiment was measured by using six
proxies.
𝜎𝑖𝑡 =
𝐸 𝑀𝑖𝑛[ 𝑅𝑖 − 𝜇𝑖
, 0]2
(𝑁 − 1)
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

14. Operationalization of Variables
• The proxies used in this study are:
S.no Variables Symbols Variable Measurement
1. No of IPO’s NOIP Number of initial public
offering issued in a single year
2. First day return on IPO FDRIPO Average First day return on
initial public offering
3. Share turnover PSXTURN Share turnover in Million
(Pakistan stock
exchange)
4. Equity Share EQSHARE Equity share in total equity
and long term debt issuance
5. Close end mutual funds
discount
CEMFD The difference between Net
Asset Value (NAV) and market
value of funds
6. Dividend premium DP The log difference of the
average M/B ratio of dividend
payers and non-payers firms
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

15. Econometric Model
𝜎𝑖𝑡
𝐸
= 𝛼0 + 𝛽1 𝜎𝑖
𝑡
−
1
𝐸
+ 𝛽2 𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑠𝑒𝑛𝑡𝑖𝑚𝑒𝑛𝑡 𝑖𝑛𝑑𝑒𝑥𝑖𝑡 + 𝛽𝑖𝑡
𝑛
∑
𝑖 = 1
𝛾𝑖𝑡
𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒
+ 𝜀𝑖𝑡
• The Control Variables are Dividend payout ratio, Firm Size &
Return on equity.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

16. Hypothesis
The impact of investors sentiments is measured through
six proxies which are number of initial public offerings,
first day return on initial public offerings, Share
turnover, close end mutual fund discount, and equity
share and dividend premium.
Hypothesis 1: Investor Sentiment index has a
significant impact on downside total risk.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

17. Research Design
17
• All Non- financial listed
companies
Population Frame
• Stratified Random Method
Sample selection
Strategy
• Total 280 Non-financial
companies
Sample Size
• Secondary Data
Data and Source
• Causal and quantitative study
Type of Study
• Dynamic Models (Arellano
Bond Estimation Model)
• STATA 14
Statistical tests and
Software (s):

18. Analysis and Discussion
18

19. Data Analysis and Result
• Descriptive Statistics:
Variable Obs Mean Std.Dev. Min Max
DS-TR 3526 0.337 0.176 0.000 1.414
INVSENT 3526 0.050 1.696 -2.946 2.924
NOIPO 3526 50.14 26.74 18.39 116.4
FDRIPO 3526 178.5 69.71 26.19 282.5
PSXTURN 3526 5850 3593 18.95 1440
EQSHARE 3526 30.78 19.65 23.05 37.61
CEMFD 3526 30.24 16.79 10.78 81.25
DP 3526 9.144 3.614 1.328 12.68
SIZE 3526 12.41 5.979 0.000 20.02
DPO 3526 41.03 11.11 0.000 16.23
ROE 3526 0.163 2.107 -2.646 52.18
DS-TR stands for downside total risk, INVSENT stands for investor sentiment index, NOIPO means number of initial
public offerings, FDRIPO is the first day return on IPO, PSXTURN is share turnover, EQSHARE is the equity share,
CEMFD stand for close end mutual funds discount, DP is Dividend premium, SIZE represents firm size, DPO is dividend
payout ratio and ROE stands for return on equity.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

20. • Correlation Matrix
DS TR INV. NOIPO FDRIPO PSXTURN EQSHARE CEMFD DP SIZE DPO ROE
DS TR 1
INV_SENT 0.07*** 1
NOIPO 0.0029 0.64*** 1
FDRIPO 0.10*** 0.68*** 0.08*** 1
PSXTURN -0.06*** -0.38*** -0.30*** 0.08*** 1
EQSHARE 0.09*** 0.96*** 0.51*** 0.74*** -0.28*** 1
CEMFD -0.09*** 0.60*** 0.74*** 0.05** -0.45*** 0.43*** 1
DP 0.11*** 0.75*** 0.13*** 0.70*** -0.06*** 0.81*** 0.06*** 1
SIZE -0.08*** -0.07*** 0.01 -0.11*** 0.03 -0.07*** 0.02 -0.10*** 1
DPO -0.12*** -0.04* 0 -0.05** 0.03 -0.03 0 -0.04* 0.37*** 1
ROE -0.01 0.02 0 0.02 0.01 0.02 0.01 0.01 0.03 0.06*** 1
***, ** & *represents significance at 1%, 5% & 10% respectively.
DS-TR stands for downside total risk, INV_SENT stands for investor sentiment index, NOIPO means number of initial public offerings, FDRIPO is first day return on IPO,
PSXTURN is share turnover, EQSHARE is the equity share, CEMFD stand for close end mutual funds discount, DP is Dividend premium, SIZE represents firm size, DPO is
dividend payout ratio and ROE stands for return on equity.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

21. The Investor sentiment and Downside Risk through Dynamic penal
Estimation (Full Sample)
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph
Regression
Coeff Std. Err. Z P>| z |
L. DSTR 0.6388*** 0.0093 68.17 0.000
INV_SENT 0.0136*** 0.0007 18.26 0.000
SIZE -0.0015*** 0.0004 -3.57 0.000
DPO -1.5900 4.7400 -0.34 0.737
ROE -0.0002 0.0005 -0.42 0.678
_cons 0.1363*** 0.0059 2.86 0.000
Sargan Test( P Value) 0.4
AR(2) Test( P Value 0.46
Wald Test 0.000
Observations 3236
Number of ID 280
***, ** & *represents significance at 1%, 5% & 10% respectively.
DS-TR stands for downside total risk, INV_SENT stands for investor sentiment index, NOIPO means number of initial
public offerings, FDRIPO is first day return on IPO, PSXTURN is share turnover, EQSHARE is the equity share, CEMFD
stand for close end mutual funds discount, DP is Dividend premium, SIZE represents firm size, DPO is dividend payout
ratio and ROE stands for return on equity.

22. Regression
• The Investor sentiment and Downside Risk through Dynamic penal
Estimation (Big Firms)
Coeff Std. Err. Z P>| z |
L. DSTR 0.5708*** 0.0034 167.49 0.000
INV_SENT 0.0194*** 0.0003 61.95 0.000
SIZE -0.0007*** 0.0001 -3.71 0.000
DPO -0.0008*** 2.8800 -6.05 0.000
ROE -0.0035*** 0.0003 -9.42 0.000
_cons 0.1555** 0.0031 49.4 0.000
Sargan Test( P Value) 0.245
AR(2) Test( P Value 0.33
Wald Test 0.000
Observations 1524
Number of ID 120
***, ** & *represents significance at 1%, 5% & 10% respectively.
DS-TR stands for downside total risk, INV_SENT stands for investor sentiment index, NOIPO means number of initial
public offerings, FDRIPO is first day return on IPO, PSXTURN is share turnover, EQSHARE is the equity share, CEMFD
stand for close end mutual funds discount, DP is Dividend premium, SIZE represents firm size, DPO is dividend payout
ratio and ROE stands for return on equity.

23. Regression
• The Investor sentiment and Downside Risk through Dynamic penal
Estimation (Small Firms)
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph
Coeff Std. Err. Z P>| z |
L. DSTR 0.6994*** 0.0044 156.33 0.000
INV_SENT 0.1345*** 0.0005 25.92 0.000
SIZE -0.0016*** 0.0003 -5.27 0.000
DPO 5.6600 4.0200 1.41 0.158
ROE -0.0000 0.0001 -0.14 0.891
_cons 0.1246*** 0.0041 30.39 0.000
Sargan Test( P Value) 0.25
AR(2) Test( P Value 0.13
Wald Test 0.000
Observations 1712
Number of ID 160
***, ** & * represents significance at 1%, 5% & 10% respectively.
DS-TR stands for downside total risk, INV_SENT stands for investor sentiment index, NOIPO means number of initial
public offerings, FDRIPO is first day return on IPO, PSXTURN is share turnover, EQSHARE is the equity share, CEMFD
stand for close end mutual funds discount, DP is Dividend premium, SIZE represents firm size, DPO is dividend payout
ratio and ROE stands for return on equity.

24. Results
• The results of the study indicate that investor
sentiment has a significant positive effect on the
downside risk (W. Ahmed; Naik & Padhi, 2016;
Sayim & Rahman, 2015; Ur Rehman, 2013).
• The impact of the investor sentiment varies across
firm size and small firms are more vulnerable to the
effects of investor sentiment Maitra and Dash (2017);
H. Yang et al. (2017).
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

25. Conclusion
• The main findings of the Research are:
 Investor sentiment has a significant impact on the firm
downside total risk.
 The impact of investor sentiment index varies across firm
size and small firms are more effected by the impact of
investor sentiment (Maitra and Dash, 2017).
 The results are also coherent with Noise Trader Theory
which states that sentiments that arise due to noise and are
without any fundamental logic may lead to deviation in
the prices of the stocks (De Long et al., 1990).
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

26. Managerial Implications
• This research has implications to bring changes in the
rules and regulations required by the SECP to reduce
the irrationality of the investors so that the risk in the
stock market can be controlled.
• The research can be used to create awareness among
the investors regarding the stock volatility.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

27. Possible Limitations of the Study
• Only Non Financial firms listed on the PSX
• Only Secondary Data was used in the research.
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph

28. Thank you
Questions ?
Investor sentiment and Firm Downside Total Risk, January 2020,Jennifer Joseph