Influence of media coverage and sentiment on seasoned equity offerings

This article examines the role of media in seasoned equity offerings (SEOs) price and market reactions on SEO announcements. Using a sample of SEO deals in UK, we find that media coverage is significantly and negatively related to SEO price discounts and market returns around SEO announcements. Moreover, we document that more pessimistic media sentiment predicts larger SEO price discounts and more negative market reactions to SEO announcements. In summary, both media coverage and media sentiment influence investor decisions in SEOs, but through different mechanisms.     

Dispersion in news sentiment and corporate bond returns

We construct a news sentiment index at the firm level by using textual analysis of news articles and find that dispersion in news sentiment is a significant predictor of corporate bond returns. Bonds of firms with high dispersion in news sentiment have a highly significant average return of 7.38 percent. A portfolio that longs bonds with high dispersion in news sentiments and shorts bonds with low dispersion earns an average biweekly return of 8.53 percent. This finding is in line with an argument that dispersion in news sentiment is a proxy for future cash flow uncertainty.     

Tournament-based incentives and mergers and acquisitions

This research examines the relation between tournament-based incentives, which are proxied by the difference between a firm's CEO pay and the median pay of the senior managers, and mergers and acquisitions (M&As). We find that tournament-based incentives are positively related to firm acquisitiveness and acquiring firms' stock and operating performance. Further analysis indicates that positive acquisition performance increases the likelihood of the CEO being promoted from inside the acquiring firm. Our evidence is consistent with the view that tournament-based incentives motivate acquiring firms' managers to make greater efforts and take more risk that result in superior acquisition performance.     

The effect of stock-based incentives and governance mechanisms on voluntary disclosure of intangibles

The purpose of this study is to investigate the role of stock-based incentives in encouraging more voluntary disclosures about firm-specific intangibles. I also examine whether corporate governance, previously found to be related to voluntary disclosures, is a complement to or substitute for stock-based incentives. Using content analysis of annual reports of a sample of high-tech firms, I find that stock-based incentives are positively associated with firms' voluntary disclosures about intangibles. With regard to the effect of governance mechanisms, I find that corporate governance does not have a relationship with disclosures when stock-based incentives are low. On the other hand, better governance will strengthen the positive effect of stock-based incentives on disclosures, suggesting that governance and incentives mechanisms are complements instead of substitutes. The results also show that this complementary effect primarily results from the internal monitoring provided by the board of directors.     

Firm life cycle,corporate risk‐taking and investor sentiment

This study investigates the corporate risk‐taking and the performance consequences at different stages of the firm life cycle. We find that risk‐taking is higher in the introduction and decline stages of the life cycle, but lower in the growth and mature stages. We also find that risk‐taking during introduction and decline stage (growth and maturity stage) affects future performance adversely (positively). We also document that managerial risk‐taking propensities increase during periods of high investor sentiment and firms in different life cycle stages respond to sentiment differently. Collectively, these results suggest that the firm life cycle has explanatory power for corporate risk‐taking behaviour.     

Managerial incentives and corporate leverage: evidence from the United Kingdom

This paper investigates the effect of managerial incentives and corporate governance on capital structure using a large sample of UK firms during the period 1999–2004. The analysis revolves around the view that managerial incentives are important in determining a firm's leverage. However, we argue that the exact impact of these incentives on leverage is likely to be determined by firm‐specific governance characteristics. To conduct our investigation, we construct a simple corporate governance measure using detailed ownership and governance information. We present evidence of a significant non‐monotonic relationship between executive ownership and leverage. There is also strong evidence suggesting that corporate governance practices have a significant impact on leverage. More importantly, the results reveal that the nature of the relation between executive ownership and leverage depends on the firm's corporate governance structure.     

The systematic pricing of market sentiment shock

ABSTRACT

We show that market sentiment shocks create demand shocks for risky assets and a systematic risk for assets. We measure a market sentiment shock as the unexpected portion of the University of Michigan Consumer Sentiment Index’s growth. This shock prices stock returns in arbitrage pricing theory framework at 1% after controlling for market, size, value, momentum, and liquidity risk factors. Its premium lowered the implied risk aversion by 97.9% to 11.46 between 1978 and 2009 in our sentiment consumption-based capital-asset-pricing model. Merton’s [1973. “An Intertemporal Capital Asset Pricing Model.” Econometrica 41: 867–887]. intertemporal capital-asset-pricing model reconfirms our finding that this market sentiment shock is a systematic risk factor that provides investment opportunities.     

Determinants and consequences of tournament incentives: A survey of the literature in accounting and finance

This paper synthesizes the theoretical underpinnings of tournament models, reviews the extant empirical literature on the determinants and consequences of tournament incentives, critiques the findings and offers suggestions for future research. We synthesize findings from 63 empirical papers and find that several firm-level fundamental and corporate governance variables affect the structure of corporate tournaments. Our review of the consequences of tournament structure reveals that tournaments affect financial reporting and auditing as well as firm-level operational and capital market-based outcomes. This review reveals that the existing accounting and finance literature lacks a strong justification for why one theory rather than another is favored. Moreover, based on potential problems that may exist in empirical models, this review also offers some methodological implications for empirical tournament studies.     

Stock-specific sentiment and return predictability

This paper quantifies the impact of stock-specific news sentiment on future financial returns. Daily predictive regressions yield significant t-statistics for 7% at most of our sample of more than 1000 large stocks listed in the USA. While a few assets do run through pockets of predictability, the evidence suggests that the feedback effect is stronger in the reverse direction: returns are more likely to drive future sentiment than the other way around.     

The short of it: Investor sentiment and anomalies

This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting in which the presence of market-wide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger (its long-short strategy is more profitable) following high levels of sentiment. Second, the short leg of each strategy is more profitable following high sentiment. Finally, sentiment exhibits no relation to returns on the long legs of the strategies.     

Investor sentiment and return predictability of disagreement

This study examines the influence of investor sentiment on the relationship between disagreement among investors and future stock market returns. We find that the relationship between disagreement and future stock market returns time-varies with the degree of investor sentiment. Higher disagreement among investors’ opinions predicts significantly lower future stock market returns during high-sentiment periods, but it has no significant effect on future stock market returns during low-sentiment periods. Our findings imply that investor sentiment is related to several causes of short-sale impediments suggested in the previous literature on investor sentiment, and that the stock return predictability of disagreement is driven by investor sentiment. We demonstrate that investor sentiment has a significant impact on the stock market return predictability of disagreement through in-sample and out-of-sample analyses. In addition, the profitability of our suggested trading strategy exploiting disagreement and investor sentiment level confirms the economic significance of incorporating investor sentiment into the relationship between disagreement among investors and future stock market returns.     

News media analytics in finance: a survey

We survey the works applying text analytics to the study of news media in financial markets beyond intraday horizons, and expand into the fundamental economic theory and concepts relevant to the field. We compare and contrast the news sources, textual analysis methods and empirical modelling approaches adopted within the literature. We distil and categorise the key empirical insights, and summarise the bibliographic history of the literature so far. While this rapidly growing field has yielded many exciting discoveries, there are a number of promising avenues for future research which will only benefit from continued advances in computational technology.     

Corporate governance and incentives in German companies: Evidence from top executive turnover and firm performance

This paper examines executive turnover—both for management and supervisory boards—and its relation to firm performance in the largest companies in Germany in the 1980s. Turnover of the management board increases significantly with poor stock performance and particularly poor (i.e. negative) earnings, but is unrelated to sales growth and earnings growth. These turnover-performance relations do not vary with measures of stock ownership and bank voting power. Supervisory board appointments and turnover also increase with poor stock performance, but are unrelated to other measures of performance.     

Tournament incentives and firm credit risk: Evidence from credit default swap referenced firms

In this paper, we evaluate the impact of managerial tournament incentives on firm credit risk in credit default swap (CDS) referenced firms. We find that intra‐firm tournament incentives are negatively related to credit risk. Our results suggest that tournament incentives reduce credit risk by alleviating the potential for underinvestment when managers are concerned about exacting empty creditors. Further, we find that tournament incentives decrease credit risk when internal governance is strong or product market competition is intense. Taken together, our results suggest that creditors perceive senior manager tournament incentives (SMTI) as a critical determinant of a firm's credit risk, particularly in settings where managerial risk aversion is high.     

Investor sentiment and economic forces

Economic theory suggests that pervasive factors should be priced in the cross-section of stock returns. However, our evidence shows that portfolios with higher risk exposure do not earn higher returns. More importantly, our evidence shows a striking two-regime pattern for all 10 macro-related factors: high-risk portfolios earn significantly higher returns than low-risk portfolios following low-sentiment periods, whereas the exact opposite occurs following high-sentiment periods. These findings are consistent with a setting in which market-wide sentiment is combined with short-sale impediments and sentiment-driven investors undermine the traditional risk-return tradeoff, especially during high-sentiment periods.     

Political sentiment and corporate social responsibility

This paper examines the association between firm-level political sentiment and corporate social responsibility (CSR). Drawing inferences from signaling and resource-based theory, we posit a positive relationship between political sentiment and CSR. Using 23,160 firm-year observations of US public firms between 2002 and 2018 as our sample, we find empirical support for our prediction. In addition, the positive relationship between political sentiment and CSR is driven by the environment, community relations, employee relations, and diversity dimensions of CSR activities. We find consistent evidence when we measure CSR using some ‘real effect’ variables. Our cross-sectional analyses reveal that the positive association between political sentiment and CSR is more evident for firms that have a high level of information asymmetry and firms that are large, mature, and active in political lobbying. Our findings remain robust to a batch of sensitivity and endogeneity tests. Overall, our findings advance the literature by highlighting the interplay between politics and firms in an ever-changing political environment.     

Investor sentiment and the underperformance of technology firms initial public offerings

This research examines the effect of individual and institutional investor sentiment toward the overall market at the time of Initial Public Offering (IPO) on the aftermarket performance of technology IPO shares. The study which is based on 1346 U.S. technology IPOs completed between 1992 and 2009 shows that the irrational component of individual investor sentiment negatively affects shares’ aftermarket performance: the more optimistic individual investors are at the time of IPO, the lower the shares’ aftermarket return. On the other hand, the rational component of institutional investor sentiment does not affect the shares’ short-run performance, yet positively affects their long-run performance. In contrast with prior theoretical models this paper shows that investor overconfidence positively affects technology IPO shares’ aftermarket performance. The paper extends the behavioral finance literature by providing evidence on the negative role played by noise trading in affecting technology and biotechnology IPO shares performance.     

Investor sentiment and management earnings forecast bias

This study investigates whether investor sentiment is associated with behavioral bias in managers’ annual earnings forecasts that are generally issued early in the year when uncertainty is relatively high. I provide evidence that management earnings forecast optimism increases with investor sentiment. Furthermore, I find that managers’ annual earnings forecasts are more pessimistic during low‐sentiment periods than during normal‐sentiment periods. Since managers lack incentives to further deflate stock prices during a low‐sentiment period, this evidence indicates that sentiment‐related management earnings forecast bias is likely to be unintentional. In addition, I find that the relationship between management earnings forecast bias and investor sentiment is stronger for firms with higher uncertainty, consistent with investor sentiment having a greater influence on management earnings forecasts when uncertainty is higher.     

Twitter investor sentiment and corporate earnings announcements

We examine the impact of firm-specific investor sentiment (FSIS) on stock returns for negative and positive earnings surprises. Using a measure constructed from firm-specific tweets, we find that FSIS has a greater impact on stock returns for negative relative to positive earnings surprises. We further show that the impact of FSIS is greater for firms whose valuation is uncertain and difficult to arbitrage. Moreover, we provide evidence of return reversals over post-announcement periods. Our results highlight the importance of FSIS around earnings announcements.     

Explaining bank stock performance with crisis sentiment

Using search volume data on crisis-related queries from Google Trends, we estimate three different measures of market-level and individual crisis sentiment. We find that the stock performance of international banks during the period Q1 2004 to Q4 2012 was significantly driven by investors’ irrational market-wide crisis sentiment. Our empirical analysis shows that irrational market-wide crisis sentiment leads investors to devalue bank stocks irrespective of idiosyncratic or macroeconomic fundamentals. Comparing this finding with results for a sample of non-financial companies, we find evidence in support of the notion that the effect of crisis sentiment on stock returns is strongest in the absence of implicit bailout guarantees.