Time-varying social mood and corporate investment distortion

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.