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Manager Sentiment and Stock Returns

67 Pages Posted: 21 Sep 2015 Last revised: 13 Sep 2017

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Joshua A. Lee

University of Georgia

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Guofu Zhou

Washington University in St. Louis - Olin School of Business; CAFR (China Academy for Financial Research)

Date Written: September 12, 2017

Abstract

This paper constructs a manager sentiment index based on the aggregated textual tone of corporate financial disclosures. We find that manager sentiment is a strong negative predictor of future aggregate stock market returns, with monthly in-sample and out-of-sample R2 of 9.75% and 8.38%, respectively, which is far greater than the predictive power of other previously-studied macroeconomic variables. Its predictive power is economically comparable and is informationally complementary to existing measures of investor sentiment. Higher manager sentiment precedes lower aggregate earnings surprises and greater aggregate investment growth. Moreover, manager sentiment negatively predicts cross-sectional stock returns, particularly for firms that are difficult to value and costly to arbitrage.

Keywords: Manager Sentiment, Textual Tone, Investor Sentiment, Asset Pricing, Return Predictability

JEL Classification: C53, G11, G12, G17

Suggested Citation

Jiang, Fuwei and Lee, Joshua A. and Martin, Xiumin and Zhou, Guofu, Manager Sentiment and Stock Returns (September 12, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2662288

Fuwei Jiang (Contact Author)

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, 100081
China

Joshua Lee

University of Georgia ( email )

Athens, GA
United States

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Guofu Zhou

CAFR (China Academy for Financial Research)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Washington University in St. Louis - Olin School of Business ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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