The relationship between aggregate investment, investor sentiment and stock returns

In this work, by using the financial statement information of the companies listed in BIST Industrials Index, I explore the relationship between firm-level investment, investor sentiment and the stock returns for the period of 2004-2014. Three sentiment measures are used. First one is the composite investor sentiment index achieved by using the principal component analysis with seven sentiment measures. Second one is the net inflow of investor capital into listed stocks. Third one is the TUIK Consumer Confidence Index. The measure of firm-level investment is based on the change in net operating assets. Fixed effect panel data analysis is used. The results are as follows: (i) There is a positive and significant relation between investment and the stock returns. (ii) There is a significant and positive relation between investment and the sentiment index and also between TUIK Consumer and Confidence Index. There is not a significant relation between investment and the net inflow of investor capital into BIST Industrial Index stocks. The results indicate that investment increases during the periods in which investors are more optimistic.