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Does Investor Sentiment Affect the Value Relevance of Accounting Information?

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  • Wen He
  • Ki Hoon Hong
  • Eliza Wu

Abstract

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.

Suggested Citation

  • Wen He & Ki Hoon Hong & Eliza Wu, 2020. "Does Investor Sentiment Affect the Value Relevance of Accounting Information?," Abacus, Accounting Foundation, University of Sydney, vol. 56(4), pages 535-560, December.
    • Handle: RePEc:bla:abacus:v:56:y:2020:i:4:p:535-560
    DOI: 10.1111/abac.12203
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    References listed on IDEAS

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    Cited by:

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    2. Shengfeng Li & Hafiz Hoque & Jia Liu, 2022. "Investor Sentiment and Firm Capital Structure," Working Papers 2022-01, Swansea University, School of Management.
    3. Li, Shengfeng & Hoque, Hafiz & Liu, Jia, 2023. "Investor sentiment and firm capital structure," Journal of Corporate Finance, Elsevier, vol. 80(C).

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