40 Pages Posted: 3 Sep 2008 Last revised: 24 Jun 2009
Date Written: June 2009
There is growing evidence in the finance literature that investor sentiment affects stock prices. We examine whether stock price reactions to earnings surprises and accruals vary systematically with the level of investor sentiment. Using quarterly drift tests and monthly trading strategy (calendar time) tests, we find evidence that holding extreme good news firms following pessimistic sentiment periods earns significantly higher abnormal returns than holding extreme good news firms following optimistic sentiment periods. Similarly, our results suggest that holding low accrual firms following pessimistic sentiment periods earns significantly higher abnormal returns than holding low accrual firms following optimistic sentiment periods. We also document that abnormal returns in the short-window around preliminary earnings announcements for extreme good news firms are significantly higher during periods of low sentiment than during periods of high sentiment. Overall, our results indicate that investor sentiment influences the source of excess returns from earnings-based trading strategies.
Keywords: investor sentiment, post-earnings announcement drift, accruals, anomalies
JEL Classification: G14, M41, M43
Suggested Citation: Suggested Citation
Livnat, Joshua and Petrovits, Christine, Investor Sentiment, Post-Earnings Announcement Drift, and Accruals (June 2009). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1262757 or http://dx.doi.org/10.2139/ssrn.1262757