Why does stock-market investor sentiment influence corporate investment?

Ding Du, Ou Hu

Research output: Contribution to journalArticle

Abstract

We examine the relationship between corporate investment and investor sentiment at the firm level with the predicted change in investor sentiment. Empirically, we find that there is a large predictable mean reversion component in investor sentiment, and that a predicted increase in investor sentiment, capturing an unwinding of past market sentiment, positively affects the investment and debt issuance of firms with lower credit ratings, but not their equity issuance. Our results suggest that the positive relationship between investor sentiment and corporate investment may be due to that corporate managers are also driven by investor sentiment.

Original languageEnglish (US)
JournalReview of Quantitative Finance and Accounting
DOIs
StatePublished - Jan 1 2019
Externally publishedYes

Fingerprint

Corporate investment
Investor sentiment
Stock market
Mean reversion
Equity issuance
Market sentiment
Credit rating
Managers
Debt

Keywords

  • Corporate investment
  • Net debt issuance
  • Net equity issuance
  • Stock-Market Investor Sentiment

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Cite this

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AB - We examine the relationship between corporate investment and investor sentiment at the firm level with the predicted change in investor sentiment. Empirically, we find that there is a large predictable mean reversion component in investor sentiment, and that a predicted increase in investor sentiment, capturing an unwinding of past market sentiment, positively affects the investment and debt issuance of firms with lower credit ratings, but not their equity issuance. Our results suggest that the positive relationship between investor sentiment and corporate investment may be due to that corporate managers are also driven by investor sentiment.

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