The effect of investor sentiment and the structure of shareholder ownership on corporate investment

Abstract

Purpose

This paper aims to investigate the relations amongst investor sentiment, the structure of shareholder ownership and corporate investment.

Design/methodology/approach

This paper develops a theoretical model, proposes hypotheses based on the predictions of the model and conducts empirical tests. The primary method is panel regression with fixed effects. The sample covers the US data for the period between 1980 and 2018.

Findings

This paper finds that firms with a higher proportion of retail investors invest more than otherwise similar firms. In the low-sentiment periods, the financially constrained firms invest less than the non-financially constraint firms. The positive effect of residual retail ownership on the investment level is higher for firms with a higher idiosyncratic risk.

Practical implications

The results suggest that larger share ownership of the relatively informed institutional investors may serve as a mechanism that could reduce the degree of overinvestment caused by higher investor sentiment and the over-optimistic of the relatively uninformed investors.

Originality/value

This paper provides an incremental theoretical and empirical contribution to the relations amongst investor sentiment, corporate investment and the structure of shareholder ownership.

Citation

Li, H. and Grundy, B. (2023), "The effect of investor sentiment and the structure of shareholder ownership on corporate investment", International Journal of Managerial Finance, Vol. 19 No. 1, pp. 155-172. https://doi.org/10.1108/IJMF-11-2021-0558