Aggregate Investment and Investor Sentiment
Indiana University - Kelley School of Business
Charles M.C. Lee
Stanford University - Graduate School of Business
June 26, 2013
We examine the empirical associations between aggregate investment, equity market returns, and investor sentiment. U.S. aggregate investment peaks during periods of positive investor sentiment (measured multiple ways), yet these higher investment periods are followed by lower equity returns (particularly for “growth” stocks). A similar pattern exists in most other developed countries. Higher investments also precede greater earnings disappointments, lower short-window earnings announcement returns, and lower macroeconomic growth. Furthermore, aggregative investment no longer predicts equity returns after controlling for ex-post forecast errors in: (1) long-term corporate earnings, and (2) macroeconomic growth indicators. We conclude aggregate investment is influenced by, and mirrors, market-wide sentiment.
Number of Pages in PDF File: 50
Keywords: Investor sentiment, Corporate Investment, Market Efficiency, Financial Accounting
JEL Classification: G10, E44, G31working papers series
Date posted: January 2, 2013 ; Last revised: June 27, 2013
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