Employee Sentiment and Stock Return Predictability

55 Pages Posted: 27 Jul 2020

See all articles by Efthymia Symitsi

Efthymia Symitsi

University of Leeds - Division of Accounting and Finance; University of Leeds - Faculty of Business

Panagiotis Stamolampros

University of Leeds - Faculty of Business

Date Written: March 3, 2020

Abstract

We propose a new measure of investor sentiment based on predictions of firms' near-term prospects, disclosed in online platforms by their employees. By aggregating this forward-looking information, we construct an Employee Sentiment Index (ESI) and find that it is a strong predictor of stock market returns with lower future returns following high employee sentiment. Its predictive ability is superior compared to existing measures of investor sentiment and commonly-studied macroeconomic variables. Further, it predicts cross-sectional returns from difficult to value and costly to arbitrage stocks. The predictive power of the ESI is explained by investors' biased beliefs about expected cash flows.

Keywords: Employee sentiment, online reviews, voluntary information disclosure, business outlook predictions, return predictability, asset pricing

JEL Classification: G12, G17, G40

Suggested Citation

Symitsi, Efthymia and Stamolampros, Panagiotis, Employee Sentiment and Stock Return Predictability (March 3, 2020). Available at SSRN: https://ssrn.com/abstract=3640661 or http://dx.doi.org/10.2139/ssrn.3640661

Efthymia Symitsi (Contact Author)

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

Panagiotis Stamolampros

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

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