Does sentiment influence corporate innovation investment?

Abstract

This study examines whether market sentiment affects innovation investment by firms in an emerging market, focusing on Korean firms. We find a significantly positive relationship between market sentiment and innovation investment. For financially constrained firms, sentiment increases both innovation and physical investment, which indicates reliance on sentiment driven equity financing. Firms that are affiliated with chaebols are more likely to adjust research and development investment in response to market sentiment. During periods of high market uncertainty such as the COVID 19 period, the effect of market sentiment on research and development decisions is stronger for financially unconstrained firms. Managerial sentiment amplifies the effect of market sentiment on innovation but does not influence physical investment. Our results show that sentiment acts as an alternative financing mechanism that supports innovation in financially constrained firms. © 2025 The Authors.