Short-termism and debt cost under bullish market sentiment

Abstract

This paper investigates the relationship between investor sentiment, short-termism, and the cost of debt in the Brazilian capital market. Specifically, it examines whether investor sentiment amplifies the impact of short-termism on debt costs and whether short-term-oriented firms can effectively reduce financing costs by exploiting optimistic market conditions. The study addresses a gap in the literature by exploring how investor sentiment interacts with short-termism in shaping corporate financing behavior, particularly in emerging markets characterized by weaker governance and limited information quality. By highlighting the limited role of sentiment and the importance of investment horizon in debt pricing, this study contributes to the behavioral corporate finance literature and offers empirical evidence from a market context often overlooked in global studies. The findings suggest that prioritizing long-term fundamentals over sentiment-driven strategies helps firms lower borrowing costs. This has implications for managers, investors, and policymakers seeking to foster financial stability and sustainable value creation through governance aligned with long-term strategic horizons. We analyze a panel of 136 non-financial firms listed on B3 S.A. – Brasil, Bolsa e Balcão (2010-2023), employing a dynamic system generalized method of moments estimator to address potential endogeneity. Additionally, we apply a pecking order framework to assess differences in capital structure decisions across investment horizons and sentiment conditions. Our results show that firm-level fundamentals, particularly higher capital expenditures and long-term investment orientation, are associated with lower debt costs, while investor sentiment has no significant direct effect. Firms with lower stock turnover, reflecting long-horizon investor bases, benefit from reduced financing costs. Under the pecking order analysis, long-horizon firms do not consistently adhere more closely to the financial hierarchy when considering cash flow deficits. However, when debt changes are driven by sentiment, deviations from the hierarchy are more pronounced among short-term-oriented firms.