TY  - JOUR
AU  - Polk,Christopher
AU  - Sapienza,Paola
TI  - The Real Effects of Investor Sentiment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10563
PY  - 2004
Y2  - June 2004
UR  - http://www.nber.org/papers/w10563
L1  - http://www.nber.org/papers/w10563.pdf
N1  - Author contact info:
Christopher Polk
Department of Finance
London School of Economics
Houghton St.
London WC2A 2AE
UK
Tel: +44 (0)20 7849 4917
Fax: +44 (0)20 7852 3580
E-Mail: c.polk@lse.ac.uk

Paola Sapienza
Kellogg School of Management
Northwestern University
2001 Sheridan Road, Evanston, IL 60208
Tel: 847/491-7436
Fax: 847/491-5719
E-Mail: paola-sapienza@northwestern.edu
AB  - We study how stock market mispricing might influence individual firms' investment decisions. We find a positive relation between investment and a number of proxies for mispricing, controlling for investment opportunities and financial slack, suggesting that overpriced (underpriced) firms tend to overinvest (underinvest). Consistent with the predictions of our model, we find that investment is more sensitive to our mispricing proxies for firms with higher R&D intensity suggesting longer periods of information asymmetry and thus mispricing) or share turnover (suggesting that the firms' shareholders are short-term investors). We also find that firms with relatively high (low) investment subsequently have relatively low (high) stock returns, after controlling for investment opportunities and other characteristics linked to return predictability. These patterns are stronger for firms with higher R&D intensity or higher share turnover.
ER  -