Target price forecasts: The roles of the 52-week high price and recent investor sentiment

This paper reveals that in addition to fundamental factors, the 52-week high price and recent investor sentiment play an important role in analysts’ target price formation. Analysts’ forecasts of short-term earnings and long-term earnings growth are shown to be important explanatory variables for target prices; equally, the 52-week high price and recent investor sentiment are also shown to explain target price levels and especially target price biases. Our analysis additionally reveals that analysts place greater weight on these two non-fundamental factors in settings with greater task complexity and to some extent in those with greater resource constraints. Conversely, on balance, the results suggest that this increased reliance does not translate into an increased impact per unit of each non-fundamental factor on forecast bias. Finally, our results show that target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies. However, in an internally consistent fashion, the informativeness of target prices for future returns is significantly reduced when greater weight is placed on either the 52-week high or recent investor sentiment in the target price formation process.     

Investor sentiment and the mean–variance relation

This study shows the influence of investor sentiment on the market's mean–variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean–variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.     

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.     

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.     

IPO first‐day returns: Skewness preference,investor sentiment and uncertainty underlying factors

In this paper, we investigate the initial public offering (IPO) first-day returns. Our focus is to examine the irrational component of the agent behavior towards IPO lotteries. Based on 234 French IPOs performed between 2002 and 2012, we find that IPOs with high initial returns have higher idiosyncratic skewness, turnover and momentum. This finding provides empirical evidence for investors' preference for stocks with lottery-like features and investor sentiment. In addition, we show that the skewness preference and the investor sentiment effect are stronger during periods of favorable market conditions. Our results are robust to the integration of uncertainty underlying factors.     

Institutional trading,investor sentiment,and lottery-like stock preferences

This paper explores the time-varying institutional investor preference for lottery-like stocks. On average, institutional investor holdings reflect an aversion to lottery-like stocks. However, I find that an institutions’ aversion to lottery-like stocks is reduced when investor sentiment is low. Moreover, I find that during low sentiment periods, institutional investors have abnormally high trading profits in more positively skewed stocks. These results suggest that institutions reduce their aversion toward lottery-like stocks during low sentiment periods to profitably trade in lottery-like stocks.     

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.     

Investor sentiment,SEO market timing,and stock price performance

This article details an investigation of the impact of investor sentiment on the probability of firms conducting seasoned equity offerings (SEOs) and on stock price performance around and subsequent to SEOs. The results show that investor sentiment has a positive impact on SEO probability and that this impact is stronger for small and young firms. Furthermore, firms conducting SEOs during high sentiment periods experience less severe short-run price drops around the issuance yet more severe post-issue long-run underperformance, compared with firms conducting SEOs during low sentiment periods. These effects of investor sentiment on stock price performance are stronger for small, young, and high market-to-book ratio firms.     

Investor sentiment and firm capital structure

We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms' debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is slower in low sentiment periods, indicating higher costs of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms' financing decisions and stock returns.     

Does Investor Sentiment Affect Earnings Management?

I hypothesize and find that earnings management via accruals is driven partially by the prevailing market‐wide investor sentiment. Managers inflate earnings in periods of higher sentiment, but report more conservatively during periods of low sentiment. Moreover, the likelihood of income‐increasing earnings management to avoid negative earnings surprises is also positively associated with investor sentiment. These results are robust to: (i) controls for time‐varying firm characteristics such as growth, investment opportunity sets, future profitability, leverage and size; (ii) macroeconomic variables such as future inflation, GDP growth, and growth in industrial production; (iii) multiple proxies for investor sentiment; and (iv) discretionary revenues as alternative measure of earnings management. Cross‐sectional analyses reveal that firms whose stock returns co‐move more with investor sentiment are more (less) likely to manage earnings upward via abnormal accruals in quarters of higher (lower) sentiment. The findings of managers’ strategic use of abnormal accruals show the need for increased attention from boards of directors, auditors and regulators to heightened managerial incentives to overstate earnings and to report optimistic earnings numbers during periods of high investor sentiment.     

隐性杠杆约束、流动性风险和投资者情绪

本文以2003—2019年间开放式主动管理型的股票型和偏股型基金为样本,以持仓占比为权重估算基金投组中A股的总市场风险暴露,检验结果表明,该序列上升反映了基金面临的隐性杠杆约束收紧,刻画了市场的弱流动性。内在逻辑在于,流动性收紧时,投资者难以通过融资直接增加杠杆,更倾向于重仓持有高市场风险头寸的股票而间接实现杠杆。本文发现隐性杠杆约束所刻画的风险在股票或基金收益截面上的无条件定价基本失效,而条件定价则依赖于低市场情绪与弱流动性。分解基金持股的敞口,进一步发现,因中小盘基金在流动性收紧时具有更强的流动性偏好,其持股的市场风险头寸能够更敏锐地捕捉到弱流动性风险。     

Stock price synchronicity,cognitive biases,and momentum

The momentum anomaly is widely attributed to investor cognitive biases, but the trigger of cognitive biases is largely unexplored. In this study, inspired by psychology studies linking cognitive biases to the noisiness of information, we examine whether momentum returns are associated with high stock price synchronicity, a manifestation of noisy firm-specific information. Our results demonstrate that momentum is more pronounced in the presence of high stock price synchronicity. This finding is robust to other explanations and firm characteristics. We also find that stock price synchronicity boosts the profitability of momentum by amplifying investor underreaction to new information.     

Does favorable investor sentiment lead to costly decisions to go public?

We investigate the real effects of decisions to undertake an initial public offering of stock in periods of favorable investor sentiment. Specifically, we examine potential effects of favorable investor sentiment on investment expenditures and how effects on investment affect firm operating performance and value as well as the likelihood of survival. We find that firms going public during periods of favorable sentiment, on average, spend substantially more on investments, especially acquisitions, than firms going public in other periods. The effect of favorable investor sentiment on investment is more pronounced for younger firms. We do not find, however, that the higher investment spending in the wake of favorable sentiment leads to worse operating or stock performance. Stock returns around acquisitions announcements are also positive for firms going public in favorable sentiment periods. The preponderance of our findings indicate that decisions to go public in favorable investor sentiment periods do not lead to corporate investment decisions that harm firm performance and value.     

Investor Sentiment and Corporate Disclosure

This paper investigates how firms react strategically to investor sentiment via their disclosure policies in an attempt to influence the sentiment‐induced biases in expectations. Proxying for sentiment using the Michigan Consumer Confidence Index, we show that during low‐sentiment periods, managers increase forecasts to “walk up” current estimates of future earnings over long horizons. In contrast, during periods of high sentiment, managers reduce their long‐horizon forecasting activity. Further, while there is an association between sentiment and the biases in analysts' estimates of future earnings, management disclosures vary with sentiment even after controlling for analyst pessimism, indicating that managers attempt to communicate with investors at large, and not just analysts. Our study provides evidence that firms' long‐horizon disclosure choices reflect managers' desire to maintain optimistic earnings valuations.     

Does Investor Sentiment Affect the Value Relevance of Accounting Information?

We investigate whether investor sentiment affects the relationships between accounting variables and contemporaneous stock returns. Using price-relevant accounting variables identified by Chen and Zhang (2007) and the investor sentiment index constructed by Baker and Wurgler (2006), we find that the value relevance of accounting variables is collectively lower in high sentiment periods than in low sentiment periods. More importantly, earnings yield appears to be more related to contemporaneous stock returns in high sentiment periods, while other accounting variables are more related to stock returns in low sentiment periods. The effect of investor sentiment on the value relevance of accounting information is stronger for firms that are more difficult to value and to arbitrage.     

Investor sentiment and interest rate volatility smile: evidence from Eurodollar options markets

This paper studies the extent to which investor sentiment affects the Eurodollar option smile and finds that there is the dynamic interplay between sentiment-driven investors and arbitrageurs. The results reveal a significant relation between investor sentiment and interest rate volatility smile. The significant relations are stronger for put options, for short-maturity options, and for periods with higher uncertainty. The results are robust when considering controlling variables, net buying pressure, different interest rate option models, model-free method, or excluding rational components from the sentiment measures. Our findings favor the limits to arbitrage hypothesis against the positive feedback hypothesis, suggesting that the sentiment effect is transitory. Change in investor sentiment explains the time-varying smile that can be explained neither by rational interest rate models nor by net buying pressure.     

Investor Sentiment,Trading Behavior and Informational Efficiency in Index Futures Markets

This paper shows that traders in index futures markets are positive feedback traders—they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment‐driven trading increases market liquidity.     

Investor Sentiment and Return Predictability of the Option to Stock Volume Ratio

We study the effect of investor sentiment on the relation between the option to stock volume ratio (O/S) and future stock returns. Relative option volume has return predictability under short sale constraints. For this reason, we expect and find a stronger O/S‐return relation during high sentiment periods than during low sentiment periods. We find that Baker and Wurgler's Investor Sentiment Index affects the O/S‐return relation after controlling for consumer sentiment indices and economic environment factors. While prior studies have used consumer sentiment indices as alternative measures of investor sentiment, our results suggest these effects are distinct.     

Information uncertainty,investor sentiment,and analyst reports

This study investigates the relationships among information uncertainty, investor sentiment, analyst reports, and stock returns in a unified framework. The effects of analyst reports on stock returns depend on the degrees of information uncertainty, indicating that recommendation upgrades (downgrades) convey more valuable positive (negative) information under higher information uncertainty. Such stock market reactions are significantly explained by investor sentiment when information uncertainty is high. Our empirical findings are robust to changes in abnormal return measures and information uncertainty proxies.     

中国个人投资者处置效应研究——一个非理性信念的视角

处置效应是指投资者过早卖出盈利股票而长期持有亏损股票的现象。大量文献表明金融市场投资者存在显著的处置效应,但其产生的原因和机理存在争议。本文在前景理论框架下,构建了包含投资者非理性预期的离散时间投资组合决策模型,发现处置效应随投资者情绪升高而减弱。本文使用我国某券商2007—2009年近177万个人投资者股票账户的交易数据进行了实证分析,得到与理论模型预测的一致结果,即投资者情绪与投资者处置效应之间呈现显著的负相关关系。而且,受情绪影响,投资者处置效应在估值难度较大的股票中更弱。本文结论对理解投资者处置效应、优化投资者卖出决策和加强资本市场基础制度建设具有一定理论和实践意义。