Market Sentiment and Firm Investment Decision-Making


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.


The file attached to this record is the author's final peer reviewed version.


Market sentiment, investment, profitability, flexibility, crisis


Danso, A., Lartey, T., Amankwah-Amoah, J., Adomako, S., Lu, Q. and Uddin, M. (2019) Market Sentiment and Firm Investment Decision-Making. International Review of Financial Analysis, 66, 101369


Research Institute

Finance and Banking Research Group (FiBRe)