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Investor Sentiment and Corporate Finance: Micro and Macro

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  • Owen A. Lamont
  • Jeremy C. Stein

Abstract

We document that net equity issuance is considerably more sensitive to aggregate stock returns and Q's than to firm-level stock returns and Q's. Very similar patterns also emerge when we look at merger activity. In light of earlier work (Campbell 1991, Vuolteenaho 2002) which finds that aggregate stock returns are less informative about future cashflows than are firm-level stock returns--and thus, potentially more strongly influenced by investor sentiment--these results suggest that both equity issuance and mergers are to a significant extent driven by market-timing considerations, as opposed to by purely fundamental factors.

Suggested Citation

  • Owen A. Lamont & Jeremy C. Stein, 2005. "Investor Sentiment and Corporate Finance: Micro and Macro," NBER Working Papers 11882, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11882
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    References listed on IDEAS

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    1. Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    2. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
    3. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    4. Stein, Jeremy C, 1996. "Rational Capital Budgeting in an Irrational World," The Journal of Business, University of Chicago Press, vol. 69(4), pages 429-455, October.
    5. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
    6. Kent Daniel & Sheridan Titman, 2006. "Market Reactions to Tangible and Intangible Information," Journal of Finance, American Finance Association, vol. 61(4), pages 1605-1643, August.
    7. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    8. Boyan Jovanovic & Peter L. Rousseau, 2002. "The Q-Theory of Mergers," American Economic Review, American Economic Association, vol. 92(2), pages 198-204, May.
    9. Owen A. Lamont, 2002. "Evaluating Value Weighting: Corporate Events and Market Timing," NBER Working Papers 9049, National Bureau of Economic Research, Inc.
    10. repec:hrv:faseco:30748164 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Fernandes, Nuno & Giannetti, Mariassunta, 2014. "On the fortunes of stock exchanges and their reversals: Evidence from foreign listings," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 157-176.
    2. Cooper, Ilan & Priestley, Richard, 2011. "Real investment and risk dynamics," Journal of Financial Economics, Elsevier, vol. 101(1), pages 182-205, July.
    3. Chau, Frankie & Deesomsak, Rataporn & Lau, Marco C.K., 2011. "Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 292-305.
    4. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    5. Koch, Rosemarie & Stadtmann, Georg, 2010. "Das Gesetz zur Angemessenheit der Vorstandsverg├╝tung," Discussion Papers 288, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    6. repec:eee:pacfin:v:46:y:2017:i:pb:p:258-268 is not listed on IDEAS
    7. Mamunur Rashid & Fauzias Mat Nor & Izani Ibrahim, 2013. "Evidence of Dividend Catering Theory in Malaysia: Implications for Investor Sentiment," Contemporary Economics, University of Finance and Management in Warsaw, vol. 7(4), December.
    8. Jiao, T. & Mertens, G.M.H. & Roosenboom, P.G.J., 2007. "Industry Valuation Driven Earnings Management," ERIM Report Series Research in Management ERS-2007-069-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    9. Kelly Nianyun Cai & Xiaoquan Jiang & Hei Wai Lee, 2013. "Debt Ipo Waves, Investor Sentiment, Market Conditions, And Issue Quality," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(4), pages 435-452, December.
    10. Shleifer, Andrei & Vishny, Robert W., 2010. "Unstable banking," Journal of Financial Economics, Elsevier, vol. 97(3), pages 306-318, September.
    11. Casalin, Fabrizio & Dia, Enzo, 2014. "Adjustment costs, financial frictions and aggregate investment," Journal of Economics and Business, Elsevier, vol. 75(C), pages 60-79.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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