Title: Time-varying social mood and corporate investment distortion

Authors: Reza H. Chowdhury; Min Thu Maung

Addresses: Department of Finance and Banking, College of Business Administration, University of Dubai, P.O. Box 14143, Dubai, UAE ' Department of Finance and Management Science, Edwards School of Business, University of Saskatchewan, Saskatoon, SK S7N 5A7, Canada

Abstract: The main objective of this article is to determine the relationship between time-varying social mood and the trend of corporate investment distortion. It is rational for firms to issue equities and invest in fixed assets during periods of hot issue markets when market-wide asymmetric information is less severe. Such hot market years can be considered as periods of optimistic social mood. In contrast, cold issue markets can be viewed as periods of pessimistic social mood. The results exhibit that corporate investments rise (fall) above (below) firms' expected levels during periods of increased (decreased) social mood. Thus, firms with high (low) capital investments invest even more (less) in fixed assets during periods of optimistic (pessimistic) social mood. Further, the findings suggest that the level of corporate investment distortion is more sensitive to firm's internal cash reserves (new security proceeds) during periods of positive (negative) social mood.

Keywords: optimistic social mood; pessimistic social mood; hot issue markets; cold issue markets; corporate investment distortion.

DOI: 10.1504/IJBAF.2014.061446

International Journal of Behavioural Accounting and Finance, 2014 Vol.4 No.2, pp.153 - 174

Received: 25 Mar 2013
Accepted: 03 Dec 2013

Published online: 30 Apr 2015 *

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