How stock market inefficiencies can affect the real economy

Mutual fund investors are known to be vulnerable to fluctuating market conditions. What is less well understood is how corporate managers are affected by waves of investor optimism. A researcher has published a study in the journal Financial Innovation, where he argues that corporate managers and investors are jointly caught up in market euphoria. Using a long time series of aggregate flows in and out of bond and equity mutual funds as a proxy for investor sentiment, the study’s author, Thorsten Lehnert, professor at the University of Luxembourg’s Department of Finance shows that the joint “moodiness” of managers and investors can predict the performance of an investment strategy that relies on differences in corporate managers’ investment behavior.

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