Investor Sentiment and Employment

We find that investor sentiment should affect a firm's employment policy in a world with moral hazard and noise traders. Consistent with the model's predictions, we show that higher US sentiment leads to: (1) higher employment growth worldwide; (2) lower labor productivity, as it hardly affects real value added growth; (3) higher (lower) real wage growth in countries with high (low) human capital; (4) greater labor instability during financial crises, especially in industries that are more dependent on external finance. The results suggest that sentiment has real effects and also lend support to the view that finance has a 'dark side'.

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