Does Aggregate Investment Reflect Investor Sentiment?

Abstract:     
Aggregate corporate investment in the U.S. 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 levels of corporate investment also precede lower corporate profitability, greater earnings disappointments, lower short-window earnings announcement returns, and lower macroeconomic growth. Furthermore, the predictive power of aggregative investment for returns becomes insignificant after accounting for ex-post forecast errors in: (1) corporate profits, and (2) macroeconomic growth indicators. We conclude aggregate corporate investment is influenced by, and indeed mirrors, investor sentiment.

Number of Pages in PDF File: 48

Keywords: Investor sentiment, Corporate Investment, Market Efficiency, Financial Accounting

JEL Classification: G10, E44, G31

working papers series