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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

Discussion Papers from Department of Economics, University of Birmingham

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 e¤ects 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 e¤ects 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: net trade credit; threshold; nonmonotonic relationship; size and liquidity. (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-08
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Journal Article: Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals (2021) Downloads
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