Investor Sentiment and Corporate Disclosure
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
March 6, 2008
This paper investigates how firms react strategically to investor sentiment via their disclosure policies in an attempt to influence the sentiment-induced biases in expectations. Proxying for sentiment using the Michigan Consumer Confidence Index, we show that during low-sentiment periods, managers increase forecasts to "walk up" current estimates of future earnings over long horizons. In contrast, during periods of high sentiment, managers reduce their long-horizon forecasting activity. Further, while there is an association between sentiment and the biases in analysts' estimates of future earnings, management disclosures vary with sentiment even after controlling for analyst pessimism, indicating that managers attempt to communicate with investors at large, and not just analysts. Our study provides evidence that firms' long-horizon disclosure choices reflect managers' desire to maintain optimistic earnings valuations.
Number of Pages in PDF File: 37
Keywords: Disclosure, Investor Sentiment, Management Forecasts, Voluntary Disclosure
JEL Classification: M10, M40, M41, M45, G29, G30, E44
Date posted: April 23, 2007 ; Last revised: March 13, 2008