Smells Like Animal Spirits: The Effect of Corporate Sentiment on Investment

Cava, Gianni La

doi:10.47688/rdp2021-11

Cited by 6 publications

(8 citation statements)

References 22 publications

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“…And finally, it might be that we are actually capturing firms that are distressed and unable to invest whether or not financial conditions worsen (e.g. La Cava 2005). This is consistent with the lack of relationship between productivity and investment for cash flow negative firms.…”

Section: Firm-level Dependencesupporting

confidence: 55%

Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia

Hambur¹,

Andrews²

2023

RBA Research Discussion Papers

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Productivity growth has slowed in Australia in recent decades. Previous research highlighted the roles of persistently weak non-mining investment and a pervasive decline in economic dynamism, including slower reallocation of labour from low- to high-productivity firms. While these facts have so far been considered separately, this paper attempts to connect them by documenting investment patterns for firms with different levels of productivity. We find that more productive firms are more likely to invest and expand their capital stock than less productive firms, but the extent to which this is true has declined over time. This has weighed on productivity, output and incomes through lower aggregate investment, and also through a less efficient allocation of that investment. We find evidence that capital reallocation slowed more in sectors that were more dependent on external finance, pointing to financing frictions as potentially playing a role. Declines have also been more pronounced in sectors with increasing mark-ups, suggesting that weaker competition may have blunted incentives for firms to expand and improve or exit.

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Section: Firm-level Dependencesupporting

confidence: 55%

Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia

Hambur¹,

Andrews²

2023

RBA Research Discussion Papers

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“…It could also be the case that the surveyed and actual responses differ or that hurdle rates do respond to changing interest rates even if they are sticky. This would be consistent with findings in La Cava (2005) and Hambur and La Cava (2018) that listed companies do change their investment as their cost of finance changes. Our results do not differentiate between these explanations, but they do indicate that evidence of sticky hurdle rates should not be taken as evidence that monetary policy does not affect investment.…”

Section: Results By Leader Versus Non-leadersupporting

confidence: 91%

Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE

Nolan,

Hambur,

Vermeulen

2023

RBA Research Discussion Papers

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We provide new evidence on the effect of monetary policy on investment in Australia using firm-level data. We find that contractionary monetary policy makes firms less likely to invest and lowers the amount they invest if they do so. The effects are similar for young and old firms, indicating that the decline in the number of young firms in Australia over time is unlikely to have weakened the effect of monetary policy. The effects are also broadly similar for smaller and larger firms. This suggests that evidence that some, particularly large, firms have sticky hurdle rates does not mean that they do not respond to monetary policy. It also suggests that overseas findings that expansionary monetary policy lessens competition by supporting the largest firms likely do not apply to Australia. We find evidence that financially constrained firms, and sectors that are more dependent on external finance, are more responsive to monetary policy, highlighting the important role of cash flow and financing constraints in the transmission of monetary policy. Finally, we find evidence that monetary policy affects firms' actual and expected investment contemporaneously, suggesting that expectations are reactive and will tend to lag over the cycle.

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“…The sensitivity of investment to sentiment is unchanged, both in terms of economic magnitude and statistical significance despite the alternative expected profit indicator. These results are outlined in more detail in the working paper version [La Cava (2021)].…”

Section: Company-level Average Relative To Pre-gfc Periodmentioning

confidence: 96%

Smells like animal spirits: the sensitivity of corporate investment to sentiment

Cava

2023

Macroecon. Dynam.

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Economists have long been interested in the effect of business sentiment on economic activity. Using text analysis, I construct a new company-level indicator of sentiment based on the net balance of positive and negative words in Australian company disclosures. Company-level investment is very sensitive to changes in this corporate sentiment indicator, even controlling for fundamentals, such as Tobin’s Q, as well as controlling for measures of company-level uncertainty. The high sensitivity of investment to sentiment could be due to several mechanisms. It could be because of animal spirits among managers or because of sentiment proxies for private information held by managers about company prospects. Overall, I find mixed evidence of the underlying causal mechanism. The effect of sentiment on investment is relatively persistent, which is consistent with managers having private information about company fundamentals. But the sensitivity of investment to sentiment is not any stronger at opaque companies in which managers are likely to be better informed than investors. Further, investment is sensitive to sentiment even when investors have an information advantage over managers by lagging the sentiment indicator by a year. Overall, the sensitivity of investment to sentiment appears to reflect both animal spirits and fundamentals. Corporate investment has been weak since the global financial crisis (GFC) and demand-side factors, such as lower sales growth, explain more than half of this weakness. Low sentiment and heightened uncertainty weighed on investment during the GFC but have been less important factors since then.

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Smells Like Animal Spirits: The Effect of Corporate Sentiment on Investment

Cited by 6 publications

References 22 publications

Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia

Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia

Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE

Smells like animal spirits: the sensitivity of corporate investment to sentiment

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