Manager sentiment and stock returns

Fuwei Jiang (), Joshua Lee (), Xiumin Martin () and Guofu Zhou ()
Additional contact information
Fuwei Jiang: School of Finance, Central University of Finance and Economics
Joshua Lee: Terry College of Business, University of Georgia
Xiumin Martin: Olin Business School, Washington University in St. Louis
Guofu Zhou: Olin Business School, Washington University in St. Louis

No 677, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper constructs a manager sentiment index based on the aggregated textual tone of corporate financial disclosures. We find that manager sentiment is a strong negative predictor of future aggregate stock market returns, with monthly in-sample and out-of-sample R2s of 9.75% and 8.38%, respectively, which is far greater than the predictive power of other previously studied macroeconomic variables. Its predictive power is economically comparable and is informationally complementary to existing measures of investor sentiment. Higher manager sentiment precedes lower aggregate earnings surprises and greater aggregate investment growth. Moreover, manager sentiment negatively predicts cross-sectional stock returns, particularly for firms that are difficult to value and costly to arbitrage.

Pages: 24 pages
Date: 2019
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Citations: View citations in EconPapers (41)

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