Qualitative Management Disclosures and Market Sentiment

45 Pages Posted: 17 Dec 2014 Last revised: 17 Oct 2015

See all articles by Khrystyna Bochkay

Khrystyna Bochkay

University of Miami Herbert Business School

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems

Date Written: December 15, 2014

Abstract

We construct an index of aggregate management optimism from managers' qualitative disclosures in annual and quarterly financial reports and show that this index varies with market-wide sentiment. First, we find that the correlation between the management optimism index and Baker and Wurgler's investment sentiment index is 0.617, and investor sentiment explains 37.7% of the time-series variation in management optimism. Second, we find that when managers are more optimistic as a group, future earnings and stock returns are lower (at both the aggregate and the firm level). We show that these results are not driven by management opportunism. Instead, the results indicate that managers, like investors, are subject to market-wide sentiment. The resulting bias reduces the usefulness of management's qualitative disclosures.

Keywords: management optimism, investor sentiment, market sentiment, qualitative disclosures, earnings, stock returns.

Suggested Citation

Bochkay, Khrystyna and Dimitrov, Valentin, Qualitative Management Disclosures and Market Sentiment (December 15, 2014). Available at SSRN: https://ssrn.com/abstract=2538812 or http://dx.doi.org/10.2139/ssrn.2538812

Khrystyna Bochkay (Contact Author)

University of Miami Herbert Business School ( email )

5250 University Drive
Coral Gables, FL 33146-6531
United States

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

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