Market sentiment and firm investment decision-making

Albert Danso, Theophilus Lartey, Joseph Amankwah-Amoah, Samuel Adomako, Qinye Lu, Moshfique Uddin

Research output: Contribution to journalArticlepeer-review

25 Citations (SciVal)


While research on factors driving corporate investment decisions has blossomed, knowledge related to the Chief Executive Officer's (CEO's) market sentiment on investment decision outcomes is lacking. In this study, we extend the existing corporate finance literature by examining the underexplored issue of how CEOs' market sentiment drives firms' investment decisions. Capitalising on a large sample of US firms for the period 2004–2014, we uncovered some crucial observations. First, we found empirical support for our theoretical contention that market sentiment drives corporate investment decisions. Second, we established that, while financial flexibility induces managers to overinvest, the expectation of future profitability leads firms to underinvest during high sentiment periods. In addition, we uncovered that the 2007/08 financial crisis significantly impacted firm behaviour and realigned managerial decision-making. Thus, the sentiment-investment relationship is more pronounced during the crisis and the post-crisis periods. Our results are robust after accounting for the possibility of endogeneity and using alternative measures of both CEOs' market sentiment and firm investment
Original languageEnglish
JournalInternational Review of Financial Analysis
Publication statusPublished - 1 Nov 2019


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