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.)
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)
New Economics Papers: this item is included in nep-fmk
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