The Power of Bad: The Negativity Bias in Consumer Sentiment Announcements on Stock Returns

35 Pages Posted: 15 Jun 2010

See all articles by Shumi M. Akhtar

Shumi M. Akhtar

The University of Sydney

Robert W. Faff

University of Queensland

Barry R. Oliver

University of Queensland - Business School; Financial Research Network (FIRN)

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: June 15, 2010

Abstract

This paper examines the equity market reaction to consumer sentiment in the context of the sentiment index issued by the Melbourne Institute of Applied Economics and Social Research. Unlike the Michigan index in the US, which is announced in phases, this index is announced once per month, which makes the Australian counterpart particularly useful for analyzing the announcement effects of sentiment. Our results indicate that consumer sentiment has valuable information content. Further, a version of the “negativity effect” (from the psychology literature) is documented in which an asymmetric response is observed with regard to “good” versus “bad” sentiment news. Specifically, when a lower (higher) than previous month consumer sentiment index is announced, the equity market experiences a significant negative announcement day (no) effect. The stock market recovers from the “bad sentiment news” shock, post announcement. The results are robust to a range of additional tests.

Keywords: Investor Sentiment, Stock Market Returns, Market Efficiency

JEL Classification: G14

Suggested Citation

Akhtar, Shumi M. and Faff, Robert W. and Oliver, Barry Ross and Subrahmanyam, Avanidhar, The Power of Bad: The Negativity Bias in Consumer Sentiment Announcements on Stock Returns (June 15, 2010). Available at SSRN: https://ssrn.com/abstract=1625342 or http://dx.doi.org/10.2139/ssrn.1625342

Shumi M. Akhtar

The University of Sydney ( email )

University of Sydney Business School
corner of Codrington Street and Darlington Street
Chippendale, NSW 2006
Australia
61290369309 (Phone)

HOME PAGE: http://www.firn.org.au

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Barry Ross Oliver

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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