Analyst Sentiment: Do Analysts Support or Correct Investor Sentiment and Manager sentiment?

Abstract

We construct a market-level analyst sentiment index by aggregating textual tones of analyst reports. We find that analyst sentiment is high when investor sentiment is high or analysts support rather than correct investors’ overoptimistic views. Consistently, the analyst sentiment index negatively predicts the aggregate stock market return. Moreover, during recent years, analyst sentiment index may better reflect the underlying investor sentiment than the existing investor sentiment indices that are surprisingly flat. Furthermore, analysts can give less favorable tones when manager sentiment is high. Overall, our findings indicate that analyst sentiment supports investor sentiment but partially correct manager sentiment.

Keywords: Investor sentiment, Manager sentiment, Mispricing, Textual tone, Return predictability

JEL Classification: C53, G11, G12, G17