Does Aggregate Investment Reflect Investor Sentiment?

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SSRN Electronic Journal

Publication Year:
2014
Usage 8505
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SSRN
SSRN Id:
2195336
DOI:
10.2139/ssrn.2195336
Author(s):
Salman Arif; Charles M.C. Lee
Publisher(s):
Elsevier BV
Tags:
Investor Sentiment; Corporate Investment; Market Efficiency; Financial Accounting
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article description
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.