Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/64931

Sentiment, Loss Firms, and Investor Expectations of Future Earnings

File Size Format  
HARC_2020_paper_288.pdf 1.37 MB Adobe PDF View/Open

Item Summary

Title:Sentiment, Loss Firms, and Investor Expectations of Future Earnings
Authors:Eddie Riedl
Estelle Sun
Guannan Wang
Keywords:investor sentiment
mispricing
earnings persistence
losses
Date Issued:01 Sep 2019
Abstract:This study investigates the mispricing of market-wide investor sentiment by exploring the relation between sentiment and investor expectations of future earnings. Prior research argues that sentiment-driven mispricing should be most pronounced for hard-to-value firms, such as those reporting losses (Baker and Wurgler 2006). Using investor expectations of future earnings, we provide empirical results consistent with this behavioral finance theory. In particular, we predict and find that investors perceive losses to be more (less) persistent during periods of low (high) sentiment; that investors perceive profit persistence to be lower (higher) during periods of low (high) sentiment; and that the effects appear stronger for loss firms relative to profit firms. In addition, we document predictable cross-sectional variation within losses, with the mispricing mitigated for losses associated with activities expected to generate future benefits: R&D, growth, large negative special items, and severe financial distress. Overall, our results document a new and important channel—investor expectations of future earnings—to explain sentiment-driven mispricing, particularly for loss firms.
URI:http://hdl.handle.net/10125/64931
Appears in Collections: 10 Financial: Financial


Please email libraryada-l@lists.hawaii.edu if you need this content in ADA-compliant format.

Items in ScholarSpace are protected by copyright, with all rights reserved, unless otherwise indicated.