Effect of Investor Sentiment on the Stock Market Reaction to Earnings News: The Case of Loss Firms

39 Pages Posted: 22 May 2015

See all articles by David Folsom

David Folsom

University of Texas at El Paso - Department of Accounting & Information Systems

Xu Li

The University of Hong Kong

Rong Zhao

University of Calgary

Date Written: May 21, 2015

Abstract

In this study, we examine the effect of investor sentiment on the stock market reaction to earnings news (i.e., the earnings response coefficient or ERC) for loss firms. We find that the ERC for loss firms’ earnings increases is less positive as sentiment increases, contrary to the findings in prior literature examining how sentiment affects the ERC for profit firms. Cross-sectional analysis reveals that the dampened ERC associated with earnings increases in loss firms during high sentiment periods is driven by various firm characteristics including low book values of equity, low R&D intensity, the inability to raise external capital, and a lack of nonrecurring write-offs. We also examine future returns and find that, on average, the effect of sentiment on loss firms’ earnings changes reverses in the second year following an earnings announcement.

Keywords: Investor sentiment; Loss firms; Earnings response coefficient

JEL Classification: M41

Suggested Citation

Folsom, David and Li, Xu and Zhao, Rong, Effect of Investor Sentiment on the Stock Market Reaction to Earnings News: The Case of Loss Firms (May 21, 2015). Available at SSRN: https://ssrn.com/abstract=2609089 or http://dx.doi.org/10.2139/ssrn.2609089

David Folsom (Contact Author)

University of Texas at El Paso - Department of Accounting & Information Systems ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

Xu Li

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Rong Zhao

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-2568 (Phone)
403-210-2217 (Fax)

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