Sentiment, Loss Firms, and Investor Expectations of Future Earnings

50 Pages Posted: 25 Sep 2017

See all articles by Eddie Riedl

Eddie Riedl

Boston University - Questrom School of Business

Estelle Sun

Boston University - Questrom School of Business

Guannan Wang

Suffolk University

Date Written: September 22, 2017

Abstract

This study investigates the mispricing of market-wide investor sentiment by exploring the relation between sentiment and investor expectations of future earnings. We predict and find that investors perceive losses to be more (less) persistent during periods of low (high) sentiment. We find similar (albeit weaker) evidence that investor perception of profit persistence is attenuated (enhanced) during periods of low (high) sentiment. This is consistent with prior research, which suggests that sentiment-driven mispricing should be most pronounced for hard-to-value firms—such as those reporting losses (Baker and Wurgler 2006). We also document predictable cross-sectional variation in the mispricing of loss firms: the mispricing of such firms is mitigated for losses associated with activities expected to generate future benefits (such as R&D, growth, and curtailments). Overall, our results add to prior literature by documenting a new and important channel—investor expectations of future earnings—to explain sentiment-driven mispricing.

Keywords: investor sentiment, mispricing, earnings persistence, losses

JEL Classification: D21, G02, G11, M41

Suggested Citation

Riedl, Edward J. and Sun, Estelle Yuan and Wang, Guannan, Sentiment, Loss Firms, and Investor Expectations of Future Earnings (September 22, 2017). Available at SSRN: https://ssrn.com/abstract=3041709 or http://dx.doi.org/10.2139/ssrn.3041709

Edward J. Riedl

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

Estelle Yuan Sun (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)

Guannan Wang

Suffolk University ( email )

Sawyer School of Management
Boston, MA 02108
United States

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