Anomalies and Investor Sentiment: Empirical Evidences in the Brazilian Market

Abstract

This study examined the relationship between investor sentiment and value anomalies in Brazil. In addition, it analyzed if pricing deviations caused by investors with optimistic views are different from those caused by pessimistic investors. The sample included all non-financial firms listed on the B3 (Brasil, Bolsa, Balcão) stock exchange from July 1999 to June 2014. We used the Principal Component Analysis multivariate technique to capture the component common to four different proxies for investor sentiment. The study empirically tested the index series and its variation on the return series of Long-Short portfolios of 12 anomaly-based strategies. The study found that the measure of the sentiment index had a partial explanatory power for the anomalies only when included in the CAPM. Yet, when using the index sentiment changes as an explanatory variable, the study found a relationship with future returns, robust to all risk factors. Thus, it is possible to relate investor sentiment index to anomaly-based portfolio returns. When analyzing average returns after optimistic and pessimistic periods, the values we found in our empirical test were not statistically significant enough to infer the possible existence of short-sale constraints.

Investor Sentiment and Earnings Management: Does Analysts’ Monitoring Matter?

“…The variables of interest of this research are investor sentiment, earnings management and the number of analysts. The investor sentiment index used in this study is based on variables of the Brazilian market, following the methodology proposed by Baker and Wurgler (2007), also adopted in other researches about the Brazilian stock market (Xavier & Machado, 2017;Yoshinaga & Castro Junior, 2012). To analyze earnings management, the model of Pae (2005) was used, which is justified since it increases the predictive power of total accruals, as it includes operating cash flow variables in addition to reversing the accruals of the previous period.…”

“…To calculate the investor sentiment index, we used four representative variables for the Brazilian capital market, namely: 1. the number of advancing issues to declining issues ratio (AD); 2. the number of IPOs (NIPO); 3. the ratio between the total volume of traded stocks and the sum of total volume of traded stocks and debt (NEI); and 4. the percentage of participation of funds as borrowers of shares (FUND). The first three variables (AD, NIPO, and NEI) were used by Xavier and Machado (2017), however, the fourth variable (FUND) was added to substitute turnover. On the last update to the index of Baker and Wurgler (2007), available at said authors' website, the turnover was suppressed from the index because it is influenced by high--frequency trades.…”

“…The alternative proxy for earnings management was obtained by the estimation of discretionary accruals through the model of Dechow (2012), which is different from the model evaluated first (Pae, 2005), in that the new model incorporates the cash flow effects. As to the alternative proxy for investor sentiment, we used the ICC of Fecomércio-São Paulo State Trade Federation (Federação do Comércio do Estado de São Paulo)-because due to the methodological proximity it is the closest index to that of the University of Michigan, (Xavier & Machado, 2017). The normality hypothesis is relaxed based on the central limit theorem (Greene, 2012).…”

Asymmetric Impact of Investor Sentiment on Brazilian Stock Market Volatility

“…Studies investigating investor sentiment in Brazil have sought to analyze its impact considering different aspects, such as its relationship with the trading volume (Marschner & Ceretta, 2019) and with market anomalies (Xavier & Machado, 2017), as well as its impact on accounting aspects such as earnings management, considering the moderating role of analysts (Miranda, Machado, & Macedo, 2018), and accruals quality (Santana, Santos, Carvalho, & Martinez, 2020). The results confirm that investor sentiment influences accounting aspects and the market phenomena in Brazil, as can be observed in more developed countries.…”

Limits to arbitrage, investor sentiment, and factor returns in international government bond markets

“…Selected studies also attempt to examine the influence of limits to arbitrage on emerging markets. The work of Xavier and Machado (2017), which focuses on Brazil, is an example. A focus limited to equity markets presents a gap that calls for further exploration.…”