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Accounting Information, Investor Sentiment, and Market Pricing

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Listed:
  • Cornell, Brad
  • Landsman, Wayne R.
  • Stubben, Stephen R.

Abstract

One of the most significant empirical findings of the behavioral finance literature is that investor sentiment affects asset prices. Baker and Wurgler (2006) finds that shares of certain firms—those that are difficult to value—are more affected by shifts in investor sentiment. We examine whether the accounting information of firms that are inherently difficult to value can mitigate sentiment-related mispricing. Our findings indicate that sentiment-related mispricing is in fact diminished in the subset of firms with high-quality accounting information. To better understand how accounting information mitigates stock market mispricing, we examine whether sentiment affects the choices made by sell-side stock analysts. When sentiment is high, analysts issue more favorable recommendations for firms that are more difficult to value, even though these firms appear to be overpriced and exhibit negative subsequent abnormal stock returns. However, this behavior is concentrated in the subset of difficult-to-value firms with low-quality accounting information.

Suggested Citation

  • Cornell, Brad & Landsman, Wayne R. & Stubben, Stephen R., 2017. "Accounting Information, Investor Sentiment, and Market Pricing," Journal of Law, Finance, and Accounting, now publishers, vol. 2(2), pages 325-345, November.
    • Handle: RePEc:now:jnllfa:108.00000017
    DOI: 10.1561/108.00000017
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    Cited by:

    1. Mei-Chen Lin, 2020. "When analysts encounter lottery-like stocks: lottery-like stocks and analyst stock recommendations," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 327-353, July.
    2. Markus Buxbaum & Wolfgang Schultze & Samuel L. Tiras, 2023. "Do analysts’ target prices stabilize the stock market?," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 763-816, October.
    3. Haitham A. Al‐Zoubi & Jennifer A. O'Sullivan & Aktham I. Al‐Maghyereh & Brendan J. Lambe, 2023. "Disentangling Sentiment from Cyclicality in Firm Capital Structure," Abacus, Accounting Foundation, University of Sydney, vol. 59(2), pages 570-605, June.
    4. Mahdi Salehi & Grzegorz Zimon & Hayder Adnan Hashim & Ryszard Jędrzejczak & Adam Sadowski, 2022. "Accounting Quality and Audit Attributes on the Stock Price Crashes in an Emerging Market," Risks, MDPI, vol. 10(10), pages 1-24, October.
    5. Zhenni Jin & Kun Guo & Yi Sun & Lin Lai & Zhewen Liao, 2020. "The industrial asymmetry of the stock price prediction with investor sentiment: Based on the comparison of predictive effects with SVR," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(7), pages 1166-1178, November.

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