What do firms’ price sensitivity to credit market sentiment tell us about them?

Abstract

Using the data in U.S. stock market, we measure the credit sentiment beta which is firms' sensitivity to the changes in the credit market sentiment and classify individual firms into the sentiment-prone, insensitive and sentiment-counter groups. First, we find that sentiment-prone firms tend to be smaller, financially constrained, unprofitable and more volatile which is consistent with our "Hard-to-Value, Difficult-to-Finance" Hypothesis. Interestingly, while sentiment-counter firms have many similar firm characteristics with sentiment-prone firms, they have relatively low leverage, liquidity risk and tend to be value stocks. In addition, these firms are more likely belong to the industries whose products have rigid demand or largely depend on government spending. Second, our results show that while sentiment-prone firms' financing and investment are affected by credit market sentiment, the sentiment has insignificant effects on the other two groups' financing and investment. Furthermore, sentiment-prone investment leads to poor operating performance, and their delisting probability is higher. Finally, in terms of stock performance, we find that sentiment-counter firms outperform sentiment-prone firms.