Synchronicity and Sentiment: Decoding Earnings Quality and Market Returns in EU under Economic Policy Uncertainty

Abstract

This study investigates the impact of economic policy uncertainty on earnings quality and market returns in the European Union, a topic of growing importance in the wake of fluctuating global economic conditions. Using data from 14 EU countries spanning the period from 2000 to 2022, the findings of this study are significant, revealing a clear correlation between heightened economic policy uncertainty and altered investor behavior, as well as a deterioration in earnings quality. We also found that (a) stock market returns are threatened by the shroud of economic uncertainty, (b) higher market sentiment anticipates a negative return but, on the other hand, lower market sentiment expects an increase in the return, (c) stock market returns are higher in the case of highly accurate analyst forecasts, and (d) stock market returns are higher in the case of a higher level of stock return synchronicity. These insights have profound implications for investors, policymakers, and scholars, offering a deeper understanding of market dynamics under uncertainty and guiding more informed decision-making in turbulent economic times.

Keywords:

• Analyst forecast accuracy
• earnings quality
• economic policy uncertainty
• market sentiment
• stock market returns
• stock return synchronicity

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Netherlands, Portugal, Spain, Sweden.

2 Francis et al. (2004) state that the lower the accruals quality is, the better the quality of reported earnings.

3 A high ECUN indicates high economic policy uncertainty (Baker, Bloom, and Davis 2016).

4 Higher (lower) level of MASE provides a bullish (bearish) signal (Yang et al., 2017).

5 Higher values of Bilinski, Lyssimachou, and Walker (2013) proxy indicate higher values of analyst forecast accuracy.

6 Higher values of Chan and Hameed (2006) proxy indicate higher values of stock return synchronicity.