Does sentiment affect capital structure decisions

Abstract

Purpose- This study aims to investigate whether investor and managerial sentiment have an effect on capital structure decisions of manufacturing firms listed on Borsa Istanbul between 2010 and 2017. This study contributes to the existing literature by including sentiment as a determinant of capital structure in the analysis as well as differentiating between investor and managerial sentiment. Methodology- To test for the relationship, Consumer Confidence Index and Real Sector Confidence Index are used to proxy for investor sentiment and managerial sentiment, respectively. Quarterly financial statements of manufacturing firms are used to collect firm specific and capital structure data for the period from 2010 to 2017. Panel data framework is employed to analyze the relationship between firm specific variables and sentiment, and leverage level of the firms. Findings- Statistically significant negative relationship is determined between investor sentiment and total leverage; and managerial sentiment and total leverage of the firms at 1% level. Hence, when sentiment goes up, representing optimism, debt level of firms goes down. Conclusion- Our findings may be explained by the Market Timing Theory which argues that equity financing is preferred by managers when the stocks of the firm are overvalued on the market. Hence, when the market has an optimistic view, measured by investor sentiment, the firms have higher levels of equity financing which lends support to this argument. The findings also support the claim that individual perceptions are influential in the decision-making process. Managers as individuals, also prefer equity financing when they are optimistic, proxied by managerial sentiment.