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Investor sentiment and firm capital structure

Shengfeng Li, Hafiz Hoque Orcid Logo, Jia Liu

Journal of Corporate Finance, Volume: 80, Start page: 102426

Swansea University Author: Hafiz Hoque Orcid Logo

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Abstract

We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our...

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Published in: Journal of Corporate Finance
ISSN: 0929-1199
Published: Elsevier BV 2023
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa63517
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Abstract: We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms' debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is slower in low sentiment periods, indicating higher costs of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms' financing decisions and stock returns.
Keywords: Investor sentiment, Capital structure, Leverage, Debt maturity, Debt capacity, Speed of adjustment, Stock returns
College: Faculty of Humanities and Social Sciences
Funders: Swansea University
Start Page: 102426