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Investor Sentiment and Firm Capital Structure

Author

Listed:
  • Shengfeng Li

    (University of Portsmouth)

  • Hafiz Hoque

    (Swansea University)

  • Jia Liu

    (University of Portsmouth)

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 faster in high sentiment periods, indicating a lower cost 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.

Suggested Citation

  • Shengfeng Li & Hafiz Hoque & Jia Liu, 2022. "Investor Sentiment and Firm Capital Structure," Working Papers 2022-01, Swansea University, School of Management.
    • Handle: RePEc:swn:wpaper:2022-01
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    File URL: https://rahwebdav.swan.ac.uk/repec/pdf/WP2022-01.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Investor sentiment; capital structure; leverage; debt maturity; debt capacity; speed of adjustment; stock returns;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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