Skip to main content

Market Sentiment and Innovation Activities

  • Tri Vi Dang and Zhaoxia Xu

We investigate potential mechanisms through which market-wide sentiment affects firms’ innovation activities. We provide evidence for the financing channel by showing that financially constrained firms are more likely to issue equity and invest more in research and development (R&D) than financially unconstrained firms at high market sentiment. Using time-varying manager sentiment measures, we find suggestive evidence for a sentiment spillover channel whereby market sentiment affects R&D investments through influencing manager sentiment. Furthermore, better patent portfolios are produced from R&D investments stimulated by high market sentiment. Market sentiment has a stronger impact on R&D than the capital expenditures of financially constrained firms.

Corresponding author
* Dang,, Columbia University Department of Economics; Xu (corresponding author),, University of New South Wales (UNSW) Business School, School of Banking and Finance.
Hide All

We thank an anonymous referee, Viral Acharya, Soku Byoun, Gary Gorton, Paul Malatesta (the editor), Bernard Salanie, Robert Shiller, Harald Uhlig, and participants at the 2013 Applied Economics Workshop at Columbia University and the 2014 Tsinghua University Finance Workshop for very helpful comments.

Hide All
Acharya, V.; Almeida, H.; and Campello, M.. “Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies.” Journal of Financial Intermediation, 16 (2007), 515554.
Aghion, P., and Howitt, P.. “A Model of Growth through Creative Destruction.” Econometrica, 60 (1992), 323351.
Alti, A.How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?Journal of Finance, 58 (2003), 707722.
Arif, S., and Lee, C. M.. “Aggregate Investment and Investor Sentiment.” Review of Financial Studies, 27 (2014), 32413279.
Asch, S. E.Effects of Group Pressure upon the Modification and Distortion of Judgment.” In Groups, Leadership and Men, Guetzkow, H., ed. Pittsburgh, PA: Carnegie Press (1951).
Asch, S. E.Opinions and Social Pressure.” Scientific American, 193 (1955), 3135.
Asquith, P., and Mullins, D.. “Equity Issues and Offering Dilution.” Journal of Financial Economics, 15 (1986), 6189.
Baker, M.; Stein, J.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 9691006.
Baker, M., and Wurgler, J.. “Investor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 16451680.
Bakke, T. E., and Whited, T.. “Which Firms Follow the Market? An Analysis of Corporate Investment Decisions.” Review of Financial Studies, 23 (2010), 19411980.
Becker-Blease, J. R., and Paul, D. L.. “Stock Liquidity and Investment Opportunities: Evidence from Index Additions.” Financial Management, 35 (2006), 3551.
Bernanke, B.; Gertler, M.; and Gilchrist, S.. “The Financial Accelerator and the Flight to Quality.” Review of Economics and Statistics, 78 (1996), 115.
Blanchard, O.; Rhee, C.; and Summers, L.. “The Stock Market, Profit, and Investment.” Quarterly Journal of Economics, 108 (1993), 115136.
Bond, P.; Edmans, A.; and Goldstein, I.. “The Real Effects of Financial Markets.” Annual Review of Financial Economics, 4 (2012), 339360.
Brown, J. R.; Martinsson, G.; and Petersen, B. C.. “Law, Stock Markets, and Innovation.” Journal of Finance, 68 (2013), 15171549.
Caballero, R.; Farhi, E.; and Hammour, M.. “Speculative Growth: Hints from the U.S. Economy.” American Economic Review, 96 (2006), 11591192.
Campbell, T. C.; Gallmeyer, M.; Johnson, S.; Rutherford, J.; and Stanley, B.. “CEO Optimism and Forced Turnover.” Journal of Financial Economics, 101 (2011), 695712.
Chen, H., and Chen, S.. “Investment-Cash Flow Sensitivity Cannot Be a Good Measure of Financial Constraints: Evidence from the Time Series.” Journal of Financial Economics, 103 (2012), 393410.
Chen, Q.; Goldstein, I.; and Jiang, W.. “Price Informativeness and Investment Sensitivity to Stock Price.” Review of Financial Studies, 20 (2007), 619650.
Chirinko, R., and Schaller, H.. “Business Fixed Investment and ‘Bubbles’: The Japanese Case.” American Economic Review, 91 (2001), 663680.
Cleary, S.The Relationship between Firm Investment and Financial Status.” Journal of Finance, 54 (1999), 673692.
De Long, J. B.; Shleifer, A.; Summers, L. H.; and Waldmann, R. J.. “The Size and Incidence of the Losses from Noise Trading.” Journal of Finance, 44 (1989), 681696.
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The Impact of Prices on Takeovers.” Journal of Finance, 67 (2012), 933971.
Erickson, T.; Jiang, C. H.; and Whited, T. M.. “Minimum Distance Estimation of the Errors-in-Variables Model Using Linear Cumulant Equations.” Journal of Econometrics, 183 (2014), 211221.
Erickson, T., and Whited, T. M.. “Measurement Error and the Relationship between Investment and q .” Journal of Political Economy, 108 (2000), 10271057.
Fang, V. W.; Tian, X.; and Tice, S.. “Does Stock Liquidity Enhance or Impede Firm Innovation?Journal of Finance, 69 (2014), 20852125.
Fazzari, S. M.; Hubbard, R. G.; and Petersen, B.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1 (1988), 141195.
Fazzari, S. M.; Hubbard, G. R.; and Petersen, B. C.. “Investment-Cash Flow Sensitivities Are Useful: A Comment on Kaplan and Zingales.” Quarterly Journal of Economics, 115 (2000), 695705.
Frank, M., and Goyal, V.. “Testing the Pecking Order Theory of Capital Structure.” Journal of Financial Economics, 67 (2003), 217248.
Gilchrist, S.; Himmelberg, C.; and Huberman, G.. “Do Stock Price Bubbles Influence Corporate Investment?Journal of Monetary Economics, 52 (2005), 805827.
Gomes, J.Financing Investment.” American Economic Review, 91 (2001), 12631285.
Grullon, G.; Michenaud, S.; and Weston, J.. “The Real Effects of Short-Selling Constraints.” Review of Financial Studies, 28 (2015), 17371767.
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 19091940.
Hall, B. H.; Jaffe, A. B.; and Trajtenberg, M.. “The NBER Patent and Citation Data File: Lessons, Insights and Methodological Tools.” NBER Working Paper No. 8498 (2001).
Hall, B. H., and Lerner, J.. “The Financing of R&D and Innovation.” In Handbook of Economics and Innovation, Hall, B. H. and Rosenberg, N., eds. Amsterdam, Netherlands: Elsevier, North-Holland (2010).
He, J., and Tian, X.. “Short Sellers and Innovation: Evidence from a Quasi-Natural Experiment.” Working Paper, available at (2014).
Holmstrom, B., and Tirole, J.. “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics, 112 (1997), 663691.
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 124.
Jermann, U., and Quadrini, V.. “Stock Market Boom and the Productivity Gains of the 1990s.” Journal of Monetary Economics, 54 (2007), 413432.
Jung, K.; Kim, Y. C.; and Stulz, R. M.. “Timing, Investment Opportunities, Managerial Discretion, and Security Issue Decision.” Journal of Financial Economics, 42 (1996), 159185.
Kaplan, S., and Zingales, L.. “Do Financing Constraints Explain Why Investment Is Correlated with Cash Flow?Quarterly Journal of Economics, 112 (1997), 169215.
Keynes, J. M.An Economic Analysis of Unemployment.” In Collected Writings, Vol. XII, London: Macmillan (1931).
Lamont, O., and Stein, J.. “Investor Sentiment and Corporate Finance: Micro and Macro.” American Economic Review, 96 (2006), 147151.
Lewellen, J., and Lewellen, K.. “Investment and Cash Flow: New Evidence.” Journal of Financial and Quantitative Analysis, 51 (2016), 11351164.
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 26602700.
Malmendier, U., and Tate, G.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 2043.
McLean, R. D., and Zhao, M.. “The Business Cycle, Investor Sentiment, and Costly External Finance.” Journal of Finance, 69 (2014), 13771409.
Morck, R.; Shleifer, A.; and Vishny, R.. “The Stock Market and Investment: Is the Market a Side Show?Brookings Papers on Economic Activity, 2 (1990), 157215.
Moscovici, S. Age of the Crowd: A Historical Treatise on Mass Psychology. Cambridge, England: Cambridge University Press (1985).
Olivier, J.Growth-Enhancing Bubbles.” International Economic Review, 41 (2000), 133151.
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187217.
Romer, P. M.Endogenous Technological Change.” Journal of Political Economy, 98 (1990), 71102.
Sherif, M.A Study of Some Social Factors in Perception.” Archives of Psychology, 27 (1935), 2346.
Shiller, R.Stock Prices and Social Dynamics.” Brookings Papers on Economic Activity, 2 (1984), 457498.
Sibley, S.; Xing, Y.; and Zhang, X.. “Is  ‘Sentiment’  Sentimental?”  Working Paper, available at (2013).
Tirole, J. The Theory of Corporate Finance. Princeton, NJ: Princeton University Press (2006).
Turner, J. C. Social Influence. Buckingham, UK: Open University Press (1991).
Whited, T., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531559.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 77 *
Loading metrics...

Abstract views

Total abstract views: 255 *
Loading metrics...

* Views captured on Cambridge Core between 10th April 2018 - 23rd May 2018. This data will be updated every 24 hours.