The Real Effects of Investor Sentiment

6th Annual Texas Finance Festival

61 Pages Posted: 1 Sep 2004

See all articles by Christopher Polk

Christopher Polk

London School of Economics

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: July 2004

Abstract

We study how stock market mispricing might in uence individual firms' investment decisions. We find a positive relation between investment and a number of proxies for mispricing, controlling for investment opportunities and financial slack, suggesting that overpriced (underpriced) firms tend to overinvest (underinvest). Consistent with the predictions of our model, we find that investment is more sensitive to our mispricing proxies for firms with higher R&D intensity (suggesting longer periods of information asymmetry and thus mispricing) or share turnover (suggesting that the firms' shareholders are short-term investors). We also find that firms with relatively high (low) investment subsequently have relatively low (high) stock returns, after controlling for investment opportunities and other characteristics linked to return predictability. These patterns are stronger for firms with higher R&D intensity or higher share turnover.

Suggested Citation

Polk, Christopher and Sapienza, Paola, The Real Effects of Investor Sentiment (July 2004). 6th Annual Texas Finance Festival, Available at SSRN: https://ssrn.com/abstract=585885 or http://dx.doi.org/10.2139/ssrn.585885

Christopher Polk (Contact Author)

London School of Economics ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/polk/

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States
847-491-7436 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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