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Investor Sentiment and Stock Market Response to Corporate News

38 Pages Posted: 25 Mar 2008 Last revised: 8 Jul 2008

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

G. Mujtaba Mian

Zayed University; Hong Kong Polytechnic University

Date Written: June 2008

Abstract

We examine whether market-wide investor sentiment influences the stock price response to firm-specific news. We use the recently developed measure of investor sentiment by Baker and Wurgler (2006, 2007) and focus on the stock price response to earnings announcements. Our results indicate that the prevailing sentiment sways stock price response to news in the direction of the sentiment - the positive stock price response to good news increases with sentiment, whereas the negative stock price response to bad news decreases with sentiment. The influence of sentiment on the stock price response is especially pronounced for small stocks, young stocks, volatile stocks, non-dividend paying stocks and distressed stocks. We find that sentiment also impacts the stock price response to dividend changes and stock split announcements.

Keywords: Investor Sentiment, Corporate News, Event Studies, Behavioral Finance

JEL Classification: D14, D21, G24

Suggested Citation

Sankaraguruswamy, Srinivasan and Mian, G. Mujtaba, Investor Sentiment and Stock Market Response to Corporate News (June 2008). Available at SSRN: https://ssrn.com/abstract=1107619 or http://dx.doi.org/10.2139/ssrn.1107619

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6874 4473 (Phone)
+65 6779 2083 (Fax)

G. Mujtaba Mian (Contact Author)

Zayed University

P.O. Box 19282
College of Business
Dubai, Dubai 19282
United Arab Emirates
+971568120604 (Phone)

Hong Kong Polytechnic University ( email )

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