Review of Financial Studies (RFS), Forthcoming
49 Pages Posted: 2 Jan 2013 Last revised: 1 Dec 2014
Date Written: November 24, 2014
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: 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