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Why does stock-market investor sentiment influence corporate investment?

Author

Listed:
  • Ding Du

    (United States Department of the Treasury)

  • Ou Hu

    (Youngstown State University)

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.

Suggested Citation

  • Ding Du & Ou Hu, 2020. "Why does stock-market investor sentiment influence corporate investment?," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1221-1246, May.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:4:d:10.1007_s11156-019-00823-6
    DOI: 10.1007/s11156-019-00823-6
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    More about this item

    Keywords

    Stock-Market Investor Sentiment; Corporate investment; Net equity issuance; Net debt issuance;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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