Investor Sentiment and Cash Conversion Cycle: The Mediating Role of Macroeconomic, Financial, and Real Activity Uncertainties

Augustine Tarkom and Lukai Yang

Journal of Behavioral Finance, 2024, vol. 25, issue 4, 496-508

Abstract: We explore the impact of investor sentiment on the cash conversion cycle (CCC) and examine how macroeconomic, financial, and real activity uncertainties mediate this relationship. Our study focuses on U.S. publicly traded firms and reveals that investor sentiment is negatively associated with CCC. Furthermore, our findings suggest that the negative correlation is primarily attributable to negative (pessimistic) sentiment, indicating that an unfavorable outlook of investors has a significant impact on CCC. We argue that the cost stickiness theory helps explain the divergent reactions of firms with positive and negative CCCs to sentiment. Additionally, we show that economic uncertainty partially mediates the relationship between sentiment and CCC. Specifically, when there are considerable economic uncertainties, managers tend to take a more proactive approach toward their CCC. Overall, our study provides valuable insights into the factors that influence firms’ CCC and highlights the need for firms to take into account investor sentiment and appropriately address uncertainties in their management of CCC.

Date: 2024
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DOI: 10.1080/15427560.2023.2217972

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