Investor Sentiment and the Stock Market Reaction to Earnings, Margin, and Expense Surprises of Profit and Loss Firms

• In Event: Market Reactions to Earnings

Abstract

In this study, we re-examine the effect of investor sentiment on the stock market reaction to earnings news (ERC) for profit and loss firms separately. We find that the ERC for earnings increases is more positive as sentiment rises for profit firms, consistent with Mian and Sankaraguruswamy (2012). In contrast, the ERC for earnings increases is less positive as sentiment rises for loss firms. The effect of sentiment on the ERC for profit firms is mostly driven by the intensified investor reaction to margin increases whereas the effect of sentiment on the ERC for loss firms is driven by the mitigated reaction to cost reduction.

Authors

• David Matthew Folsom, Lehigh University

• Xu Li, lehigh university

• Rong Zhao, university of calgary