Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals

Yiannis Karavias, Stella Spilioti () and Elias Tzavalis
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Stella Spilioti: Athens University of Economics and Business

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 4, No 13, 1593-1621

Abstract: Abstract We investigate the existence of evidence of investor sentiment on share price deviations from their intrinsic values across two sentiment regimes of shares market: the low-to-normal and the excess one. We use the residual income valuation model to calculate the intrinsic values of shares based on accounting fundamentals and we suggest a panel data threshold model to capture the sentiment regimes of the market, using as threshold variable alternative investor sentiment indices. The suggested model enables us, first, to endogenously identify from the data the threshold value of a sentiment index triggering market sentiment regime shifts and, based on it, to examine if the effects of investor sentiment on share prices across the above two sentiment regimes are in accordance to the theory. Application of the model to UK data shows that investor sentiment influences positively share prices in the low-to-normal and negatively in the excess one. We also show that investor sentiment dominates risk premium effects on shares characterized by low book-to-market, and dividend- and earnings-to-price ratios. The above results are consistent with the predictions of the sentiment hypothesis.

Keywords: Asset pricing; Investor sentiment; Risk premium; Assymetric effects; Cointegration; Threshold regression (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Working Paper: Investor Sentiment Effects on Share Price Deviations from their Intrinsic Values Based on Accounting Fundamentals (2020)
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DOI: 10.1007/s11156-020-00937-2

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