Sentiment, investment decision and short-termism

Purpose This paper aims to investigate the influence of investor sentiment on corporate investment decisions, with a particular focus on whether firms engage in short-termism during bullish periods. Design/methodology/approach Grounded in catering theory, the study incorporates the investment horizon to distinguish between long- and short-term-oriented firms. Using a sample of 204 non-financial companies listed on B3 (B3 S.A. - Brasil, Bolsa, Balcão) from 2009 to 2023, we employ a dynamic panel data approach via the two-step system generalized method of moments (System-GMM). Findings Investor sentiment increases the capital expenditures-to-depreciation ratio, supporting the view that investor sentiment influences the firm’s investment decisions. However, we reject the notion that the investment horizon has a positive influence on the relationship between investor sentiment and corporate investments, as long-horizon firms are more sensitive to sentiment. In contrast, short-horizon firms align their investments more closely with fundamentals such as Tobin's Q, suggesting differing investment behaviors across firm horizons. Our findings are robust to sensitivity analyses. Practical implications These results underscore the importance for corporate decision-makers of recognizing how investor sentiment can influence capital investment decisions. Understanding this relationship may improve strategic planning during periods of market optimism. Originality/value This study extends catering theory by explicitly incorporating the investment horizon into the analysis of short-termism. By distinguishing between long- and short-horizon firms, the paper offers novel insights into how sentiment affects investment behavior, with relevant implications for corporate strategy and investor relations in emerging markets.