Firm-Specific Investor Sentiment and Productivity

Using a sample of U.S. public firms between 2010 and 2019, we document a positive relation between firm-specific investor sentiment (FSIS) and total factor productivity (TFP). The positive relation remains robust to three identification methods: a difference-in-differences (DID) analysis employing firms' additions to the S&P 500 or Russell 1000 index, high-dimensional fixed effects, and FSIS measured by its change or lagged term. Our path analysis reveals the significance of employee sentiment as a mediator between FSIS and TFP, indicating the crucial role of employee morale and motivation in channeling the positive relation between FSIS and TFP. Furthermore, we find that the positive relation between FSIS and TFP is more pronounced for firms with limited exposure to automated production, higher managerial ownership, tighter financial constraints, and greater innovative efficiency. Taken together, our study highlights the behavioral nature of investor sentiment in the financial market and its significant implications for corporate outcomes