Accounting Information, Investor Sentiment, and Market Pricing

Journal of Law, Finance, and Accounting (JLFA) , Forthcoming

31 Pages Posted: 9 Jun 2014 Last revised: 7 Mar 2017

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Stephen Stubben

University of Utah

Date Written: February 1, 2017

Abstract

One of the most significant empirical findings of the behavioral finance literature is that investor sentiment affects asset prices. Baker and Wurgler (2006) finds that shares of certain firms — those that are difficult to value — are more affected by shifts in investor sentiment. We examine whether the accounting information of firms that are inherently difficult to value can mitigate sentiment-related mispricing. Our findings indicate that sentiment-related mispricing is in fact diminished in the subset of firms with high-quality accounting information. To better understand how accounting information mitigates stock market mispricing, we examine whether sentiment affects the choices made by sell-side stock analysts. When sentiment is high, analysts issue more favorable recommendations for firms that are more difficult to value, even though these firms appear to be overpriced and exhibit negative subsequent abnormal stock returns. However, this behavior is concentrated in the subset of difficult-to-value firms with low-quality accounting information.

Keywords: Investor Sentiment, Accruals Quality, Stock Prices, Equity Analysts

JEL Classification: G12, M41

Suggested Citation

Cornell, Bradford and Landsman, Wayne R. and Stubben, Stephen, Accounting Information, Investor Sentiment, and Market Pricing (February 1, 2017). Journal of Law, Finance, and Accounting (JLFA) , Forthcoming, Available at SSRN: https://ssrn.com/abstract=2447695 or http://dx.doi.org/10.2139/ssrn.2447695

Bradford Cornell

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Stephen Stubben

University of Utah ( email )

1655 E. Campus Center
Salt Lake City, UT 84112
United States

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