Investors sentiment and adverse selection costs

This study examines the effect of investors sentiment on adverse selection costs using companies listed on the KOSPI market as a sample. (1)Whether there is a difference in the size of adverse selection costs when investors sentiment levels are different, (2)Whether the relationship between investors sentiment and adverse selection costs differs depending on the trading ratio of individual investor, and (3)Whether the relationship between investors sentiment and adverse selection costs varies depending on the difference in the information environment for each stock. Data on companies listed on the Korea Exchange from 2014 to 2023 are collected for empirical analysis. As expected when developing the hypothesis, the size of adverse selection costs was small when the investors sentiment level was high, and the negative relationship between investors sentiment and adverse selection costs was strengthened in samples with a lot of individual investor trading. In addition, this relationship is strengthened when the stock market information environment is relatively poor.