The Relationship between Investor Sentiment and Capital Structure: Evidence from the Tehran Stock Exchange
Keywords:
capital structure, Investor sentimentAbstract
Objective: This study aimed to examine the relationship between investor sentiment and major dimensions of capital structure, including leverage ratio, debt maturity, and the speed of financial leverage adjustment, among companies listed on the Tehran Stock Exchange.
Methodology: This applied study employed a descriptive-correlational, ex post facto design. The study population consisted of companies listed on the Tehran Stock Exchange, from which 127 firms were selected through systematic exclusion criteria over an eight-year period from 2016 to 2024, yielding 1,016 firm-year observations. Financial and market data were extracted from published corporate financial statements and capital-market information. Investor sentiment was measured using a composite index incorporating relative strength, the psychological line, trading volume, and the adjusted share-turnover rate. Leverage ratio, debt maturity, and the speed of leverage adjustment were specified as the dependent variables. The hypotheses were tested using multiple panel-data regression models in EViews.
Findings: Inferential results indicated that investor sentiment had a significant negative effect on the leverage ratio (β=−0.098, t=−6.881, p<0.001), while the corresponding model was statistically significant (F=86.691, p<0.001, R²=0.930). Investor sentiment was positively and significantly associated with debt maturity (β=0.018, t=2.542, p=0.011), with the second regression model also reaching statistical significance (F=35.364, p<0.001, R²=0.844). Moreover, investor sentiment exerted a significant positive effect on the speed of financial leverage adjustment (β=0.034, t=4.350, p<0.001); the third model was likewise significant (F=216.975, p<0.001, R²=0.660). Accordingly, all three research hypotheses were supported, consistent with the directions reported in the study.
Conclusion: Investor sentiment constitutes a significant behavioral determinant of corporate financing decisions. Higher market sentiment is associated with lower leverage, longer debt maturity, and a faster adjustment toward target leverage. These findings reinforce the relevance of behavioral finance in explaining capital-structure choices and suggest that managers, investors, and financial analysts should consider market sentiment alongside firm fundamentals when evaluating financing and debt policies.
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