Investor Sentiment and the (Discretionary) Accrual-return Relation

Jiajun Jiang (), Qi Liu () and Bo Sun

No 1300, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Discretionary accruals are positively associated with stock returns at the aggregate level but negatively so in the cross section. Using Baker-Wurgler investor sentiment index, we find that a significant presence of sentiment-driven investors is important in accounting for both patterns. We document that the aggregate relation is only prominent during periods of high investor sentiment. Similarly, the cross-section relation is considerably stronger in high-sentiment periods in both economic magnitude and statistical significance. We then embed investor sentiment into a stylized model of earnings management, and illustrate that a positive (negative) relationship between stock returns and earnings management can endogenously emerge in the aggregate (cross section). Our analysis suggests that the (discretionary) accrual-return relation at both the aggregate and firm levels at least partially reflects mispricing that is related to market-wide investor sentiment.

Keywords: Investor sentiment; Uncertainty; Earnings management; Accrual anomaly (search for similar items in EconPapers)
JEL-codes: D82 D83 G12 G14 (search for similar items in EconPapers)
Pages: 27
Date: 2020-09-18
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1300

DOI: 10.17016/IFDP.2020.1300

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