News-based sentiment and the value premium

The literature has documented that growth stocks are long-duration assets that are sensitive to shocks to the market discount rate, and value stocks, being short-duration assets, are sensitive to shocks to future cash flows. However, there is an ongoing debate as to whether the co-movement of value stocks with other value stocks and growth stocks with other growth stocks is due to similarities in cash-flow characteristics (i.e., the fundamental-based view) or due to a time-varying discount rate applied to cash flows (i.e., the sentiment-based view). While most studies take a fundamental approach to answer this question, we provide a sentiment-based explanation of the value premium by using the sentiment of news articles pertaining to cash-flow risks and discount-rate shocks. Our findings are consistent with the literature for the main drivers of the value premium but in support of the sentiment-based view, not through a rejection of the fundamental view but through a novel method for quantifying the time-varying discount rate that investors apply to cash flows.