Firm Specific Investor Sentiment

• In Event: DSFI Session 2

Abstract

A significant body of research is devoted to examining the effect of investor sentiment on the price response to firm-level disclosures. Absent a firm-level measure of sentiment, these studies have used proxies of market-wide sentiment. In this paper we introduce a measure of firm-specific investor sentiment and use it to gain insights into sentiment’s effect on the price response to earnings surprises. We develop a simple model which predicts that the greater the level of firm-specific sentiment, the weaker the relation between announcement return and earnings surprise and the more negative the market response to earnings that just meet expectations. Using our proxy for firm-specific investor sentiment, we find strong empirical support for both of the model’s key predictions. In addition, we show that our firm-specific measure has greater explanatory power for announcement returns than does the market-wide sentiment measure used in prior literature.

Author

• omri even tov, UCLA