Individual Investors’ Sentiment and Temporary Stock Price Pressure

I hypothesize and find that earnings management via accruals is driven partially by the prevailing market‐wide investor sentiment. Managers inflate earnings in periods of higher sentiment, but report more conservatively during periods of low sentiment. Moreover, the likelihood of income‐increasing earnings management to avoid negative earnings surprises is also positively associated with investor sentiment. These results are robust to: (i) controls for time‐varying firm characteristics such as growth, investment opportunity sets, future profitability, leverage and size; (ii) macroeconomic variables such as future inflation, GDP growth, and growth in industrial production; (iii) multiple proxies for investor sentiment; and (iv) discretionary revenues as alternative measure of earnings management. Cross‐sectional analyses reveal that firms whose stock returns co‐move more with investor sentiment are more (less) likely to manage earnings upward via abnormal accruals in quarters of higher (lower) sentiment. The findings of managers’ strategic use of abnormal accruals show the need for increased attention from boards of directors, auditors and regulators to heightened managerial incentives to overstate earnings and to report optimistic earnings numbers during periods of high investor sentiment.

Section: Hypothesis Developmentmentioning

confidence: 99%

Does Investor Sentiment Affect Earnings Management?

Simpson

2013

“…Schmeling () uses survey‐based measures of consumer confidence for 18 countries and confirms the results that high sentiment predicts low future returns. Chan and Fong () analyze a survey‐based sentiment indicator published by a Hong Kong newspaper. They find that the publication of the index has a short‐term impact on the prices of small and medium‐sized stocks, but not on the prices of large stocks.…”

Section: Prior Literaturementioning

confidence: 99%

Market Response to Investor Sentiment

Hengelbrock¹,

Theissen²,

Westheide

2013

“…Using their investor sentiment index, Baker and Wurgler demonstrate a negative association between beginning-ofthe-period sentiment and subsequent stock returns for firms that are difficult to value, specifically, small firms, young firms, high stock return volatility firms, non-profitable firms, non-dividend paying firms, and extreme growth firms. Traditionally, research on investor sentiment focused on examining alternative measures of investor sentiment (e.g., Chan & Fong, 2004;Joseph, Wintoki, & Zhang, 2011;Neal & Wheatley, 1998;Schmeling, 2009;Tetlock, 2007) and on factors that affect the relationship between investor sentiment and the distribution of stock returns (e.g., Berger & Turtle, 2012;Chung, Hung, & Yeh, 2012;Fong & Toh, 2014;Hengelbrock, Theissen, & Westheide, 2013). Of more relevance to this study is research on the relationship between investor sentiment and the characteristics of analysts' forecasts and recommendations.…”

Section: Investor Sentimentmentioning

confidence: 99%

Determinants of the relationship between investor sentiment and analysts’ private information production

Keshk

Wang

2018

We examine whether and how investor sentiment affects analysts’ private information production and the factors that moderate this influence. As expected, analysts’ private information production (measured by the information asymmetry component of analyst forecast dispersion) is significantly negatively associated with investor sentiment. Our tests also show that higher institutional holdings of stock, longer analysts’ earnings forecasting experience, and higher levels of short selling of stock mitigate this negative influence of sentiment on analysts’ private information production. Our findings are informative for researchers, financial analysts, and market participants who rely on analysts’ forecasts to form earnings expectations.