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Does Investor Sentiment Affect the Value Relevance of Accounting Information?
Author(s) -
He Wen,
Hong Ki Hoon,
Wu Eliza
Publication year - 2020
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12203
Subject(s) - stock (firearms) , economics , accounting information system , earnings , relevance (law) , econometrics , value (mathematics) , arbitrage , financial economics , accounting , statistics , mathematics , mechanical engineering , political science , law , engineering
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.