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Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals

Author

Listed:
  • Yiannis Karavias

    (University of Birmingham)

  • Stella Spilioti

    (Athens University of Economics and Business)

  • Elias Tzavalis

    (Athens University of Economics and Business)

Abstract

We investigate the existence of evidence of investor sentiment on share price deviations from their intrinsic values across two sentiment regimes of shares market: the low-to-normal and the excess one. We use the residual income valuation model to calculate the intrinsic values of shares based on accounting fundamentals and we suggest a panel data threshold model to capture the sentiment regimes of the market, using as threshold variable alternative investor sentiment indices. The suggested model enables us, first, to endogenously identify from the data the threshold value of a sentiment index triggering market sentiment regime shifts and, based on it, to examine if the effects of investor sentiment on share prices across the above two sentiment regimes are in accordance to the theory. Application of the model to UK data shows that investor sentiment influences positively share prices in the low-to-normal and negatively in the excess one. We also show that investor sentiment dominates risk premium effects on shares characterized by low book-to-market, and dividend- and earnings-to-price ratios. The above results are consistent with the predictions of the sentiment hypothesis.

Suggested Citation

  • Yiannis Karavias & Stella Spilioti & Elias Tzavalis, 2021. "Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1593-1621, May.
  • Handle: RePEc:kap:rqfnac:v:56:y:2021:i:4:d:10.1007_s11156-020-00937-2
    DOI: 10.1007/s11156-020-00937-2
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    Cited by:

    1. Huihui WU & Chunpeng YANG, 2022. "Investor Sentiment, Extrapolation and Asset Pricing," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 182-205, December.

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    More about this item

    Keywords

    Asset pricing; Investor sentiment; Risk premium; Assymetric effects; Cointegration; Threshold regression;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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