When opaque firms borrow: The role of investor sentiment

We examine the effect of firm opacity on debt growth and how investor sentiment shapes this relationship. Using an international sample of firms during 2005–2019, we find that firm opacity negatively influences the growth in both bank and total debt ratios. This relationship is more relevant during periods of high investor sentiment. The role of investor sentiment is more prominent for firms with a lower proportion of bank ownership. The joint effect of firm opacity and investor sentiment is more relevant in countries with more developed institutions and greater creditor rights protection. Our results hold after addressing potential endogeneity concerns and additional tests. • Positive relationship between corporate opacity and debt growth • Stronger effect observed in bank debt compared to total debt • Banks' selectivity in high market optimism • Strong institutions and creditor protections shape opacity-debt dynamics