Market Efficiency and Sentiment Indicators: Are market reactions to new company investments driven by value or sentiment?

This study provides evidence on how market values adjust to new investment in the presence of investor sentiment. Markets react negatively to certain investments when sentiment is strong and more positively in periods when sentiment is weaker. Leading indicators of market sentiment are significant predictors of the market reaction to announcements of organic investment. In particular, high positive (negative) sentiment has a significantly negative (positive) relationship with abnormal returns to R&D announcements. Our results imply valuation based on fundamentals rather than sentiment. Our findings are an important step in understanding how markets correct when market sentiment is high.