Aggregate Investment and Investor Sentiment

49 Pages Posted: 2 Jan 2013 Last revised: 1 Dec 2014

Salman Arif

Indiana University - Kelley School of Business - Department of Accounting

Charles M.C. Lee

Stanford University - Graduate School of Business

Date Written: November 24, 2014

Abstract

Using bottom-up information from corporate financial statements, we examine the relation between aggregate investment, future equity returns, and investor sentiment. Consistent with the business cycle literature, corporate investments peak during periods of positive sentiment, yet these periods are followed by lower equity returns. This pattern exists in most developed countries and survives controls for discount rates, equity flows, valuation multiples, operating accruals, and other investor sentiment measures. Higher aggregate investments also precede greater earnings disappointments, lower short-window earnings announcement returns, and lower macroeconomic growth. We conclude aggregate corporate investment is an alternative, and possibly sharper, measure of market-wide investor sentiment.

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

JEL Classification: G10, E44, G31, G12, G14, G15

Suggested Citation

Arif, Salman and Lee, Charles M.C., Aggregate Investment and Investor Sentiment (November 24, 2014). Review of Financial Studies (RFS), Forthcoming; Rock Center for Corporate Governance at Stanford University Working Paper No. 181; Kelley School of Business Research Paper No. 2014-44. Available at SSRN: https://ssrn.com/abstract=2195336 or http://dx.doi.org/10.2139/ssrn.2195336

Salman Arif (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Paper statistics

Downloads
972
Rank
17,691
Abstract Views
5,872