Sentiment, Attention, and Earnings Pricing

Abstract

We find that investor sentiment restrains the predictability of earnings news on announcement returns but the constraining effect of sentiment on the predictive power of earnings news diminishes as sentiment falls. We document that investor attention works as an important channel in the relation between investor sentiment and announcement returns. Investor attention enhances the immediate price reaction to earnings news by curbing the impact of sentiment on the predictive power of earnings news. Our findings reflect the joint effect of attention and sentiment on the source of excess returns documented in the prior earnings-based market anomaly literature.

Keywords:

• Firm-level retail investor sentiment
• Firm-level retail investor attention
• Earnings announcements
• PEAD
• Market efficiency

Notes

1 We would like to thank StockTwits for their generous support and provision of proprietary data for use in this research.

2 In unreported tests, we find similar results using the measure of sentiment shock (${\mathit{\text{DSS}}}_{i,t}$−${\mathit{\text{DSS}}}_{i,t-1}$).