Dynamic risk management and investor sentiment
This paper predicts that investor sentiment can play a significant role in firms' investments, the float, and disclosure precision. Such predictions depend on how firms' managers or entrepreneurs manage risk across multiple periods. While firms' managers can choose to cluster their entire risk at one point in time, we predict the set of circumstances under which the managers would strictly prefer to absorb risks over multiple points in time. Further, we find that greater investments do not necessarily ensure greater welfare particularly when investor sentiment is significantly positive. Moreover, our analysis generates several predictions regarding how investor sentiment affects each of managers' risk management policies across multiple periods, the percentage of shares floated (or issued) by the firm, the disclosure precision choice and managers' welfare.
Swaminathan Sridharan, Xue Jia
Sridharan, Swaminathan, and Xue Jia. 2020. Dynamic risk management and investor sentiment.