Journal Archive

korean management review - Vol. 50 , No. 2

[ Article ]
korean management review - Vol. 49, No. 6, pp. 1351-1380
Abbreviation: kmr
ISSN: 1226-1874 (Print)
Print publication date 31 Dec 2020
Received 04 May 2020 Revised 06 Jul 2020 Accepted 22 Jul 2020
DOI: https://doi.org/10.17287/kmr.2020.49.6.1351

The Impact of Investor Sentiment on Value Relevance of Accounting Information
Jeong-han Baek ; Young-min Kwak
(First Author) Assistant Professor of Business Administration at Dongguk University(Gyeongju) (jhbaek@dongguk.ac.kr)
(Corresponding Author) Associate Professor of Accounting at Ulsan University (ymkwak@ulsan.ac.kr)

투자자 심리가 회계정보의 가치관련성에 미치는 영향

Copyright 2011 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION
This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This study provide empirical evidence that the differential impact of investor sentiment on value relevance of accounting components, in particular book value and net incomes which have different economic implication. It takes into account the possibility that the tendency of investors to rely on certain information will give greater weights to information which is consistent with their sentiment. Unlike prior accounting studies which measured investor sentiment index at the market-wide level, this study measured investor sentiment at the individual firm level, considering that investor sentiment varies with each firms, even at the same period.

Using a cross-section of companies listed KOSPI stock market spanning 2011 - 2017, we find that net income is more value relevant in high sentiment firms relative to low sentiment firms, while book value is more relevant in low sentiment firms relative to high sentiment firms. In low sentiment, these results are consistent with investors placing a greater weight upon book value, which shows accounting information of current valuation. In high sentiment, investors placing a greater weight upon net income, which shows accounting signal of firms’ future performance.


Keywords: Investor sentiment, noise trader, accounting information, value relevance

References
1. Akbar, S., and A. W. Stark(2003), “Deflators, Net Shareholder Cash Flows, Dividends, Capital Contributions and Estimated Models of Corporate Valuation,” Journal of Business Finance and Accounting, 30(9-10), pp.1211-1233.
2. Ali, A., and U. Gurun(2009), “Investor Sentiment, Accurals Anomaly and Accruals Management,” Journal of Accounting, Auditing and Finance, 24(3), pp.415-431.
3. Bae, K. H., T. Yamada, and K. Ito(2006), “How do individual, Institutional, and Foreign Investor Win and Lose in Equity Trades? Evidence from Japan.” International Review of Finance, 6(3-4_, pp.129-155.
4. Baek, J. H., and J. S. Choi(2014), “The Effects of the Change of Operating Income Disclosure Policy under K-IFRS,” Management and Information System Review, 33(3), pp.167-187.
5. Baker, M., and J. Stein(2004). “Market Liquidity as a Sentiment Indicator,” Journal of Financial Market, 7, pp.271–299.
6. Baker, M., and J. Wurgler(2004), “A Catering Theory of Dividends,” Journal of Finance, 59 (3), pp.1125–1165.
7. Baker, M., and J. Wurgler(2006), “Investor Sentiment and the Cross-Section of Stock Returns,” Journal of Finance, 61(4), pp.1645–1680.
8. Bakshi, G., and Z. Chen(2001), “Stock Valuation in Dynamic Economics,” Journal of Financial Markets, in press.
9. Ball, R., and P. Brown(1968), “An Empirical Evaluation of Accounting Income Numbers,” Journal of Accounting Research, 6, pp.159-178.
10. Ball, R., and R. Watts(1972), “Some Time Series Properties of Accounting Income,” The Journal of Finance, 27(2), pp.663-681.
11. Barber, B., and T. Odean(2001), “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” The Quarterly Journal of Economics, 116(Feb), pp.261-292.
12. Barber, B., Y. T. Lee, Y. J. Liu, and T. Odean(2009), “Just How Much do Individual Investors Lose by Trading?” Review of Financial Studies, 22(2), pp.609-632.
13. Barth, M., W. Beaver, and W. Landsman(1998), Relative Valuation Roles Equity Book Value and Net Income as a Function of Financial Health, Journal of Accounting and Economics, 25, pp.1-34.
14. Barth, M., and G. Clinch(2009), “Scale Effects in Capital Markets-Based Accounting Research,” Journal of Business Finance & Accounting, 36(3-4), pp.253-288.
15. Barth, M., and S. Kallapur(1996), “The Effects of Cross-Sectional Scale Differences on Regression Results in Empirical Accounting Research,” Contemporary Accounting Research, 13(fall), pp.527-267.
16. Bergman, N., and S. Roychowdhury(2008), “Investor Sentiment and Corporate Disclosure,” Journal of Accounting Research, 46(5), pp.1057-1083.
17. Berger, P., E. Ofek, and I. Swary(1996), “Investor Valuation of the Abandonment Option,” Journal of Financial Economics, 42(2), pp.259-287.
18. Black, F.(1986), “Noise”, Journal of Finance, 41(3), pp.528-543.
19. Brown, G., and M. Cliff(2005), “Investor Sentiment and Asset Valuation,” Journal of Business, 78(2), pp.405-440.
20. Brown, N., T. Christensen, W. Elliot, and R. Mergenthaler(2012), Investor Sentiment and Pro Forma Earnings Disclosures, Journal of Accounting Research, 50(1), pp.1-40.
21. Brown, S., K. Lo, and T. Lys(1999), “Use of R2 in Accounting Research: Measuring Changes in Value Relevance over the Last Four Decades,” Journal of Accounting and Economics, 28(2), pp.83-115.
22. Burgstahler, D., and I. Dichev(1997), Earnings, Adaptation and Equity Value, The Accounting Review, 72(2), pp.187-215.
23. Chen, H., T. T. L. Chong, and X. Duan(2010), “A Principal-Component Approach to Measuring Investor Sentiment,” Quantitative Finance, 10(4), pp.339-347.
24. Cheng, C. S. A., J. K. Cheung, and V. Gopalakrishan (1993), “On the Usefulness of Operation Income, Net Income and Comprehensive Income in Explaining Security Returns,” Accounting and Business Research, 23(1), pp.195-203.
25. Christiansen, C., J. N. Eriksen, and S. V. MØller (2014), “Forecasting US Recessions: The Role of Sentiment,” Journal of Banking & Finance, 49(Dec), pp.459-468.
26. Collins, D., and S. Kothari(1989), “An Analysis of Intertemporal and Cross-Sectional Determinants of Earnings Response Coefficients,” Journal of Accounting and Economics, 11(2-3), pp.143-181.
27. Collins, D., M. Pincus, and H. Xie(1999), “Equity Valuation and Negative Earnings: The Role of Book Value of Equity,” The Accounting Review, 74(1), pp.29-61.
28. Conrad, J., B. Cornell, and W. Landsman(2002), “When Is Bad News Really Bad News?” The Journal of Finance, 57(6), pp.2507-2532.
29. DeLong, J., A. Shleifer, L. Summers, and R. Waldmann (1990), “Positive Feedback Investment Strategies and Destabilizing Rational Speculation,” Journal of Finance, 45(2), pp.379-395.
30. Easton, P. D, and Sommers, G. A(2003), “Scale and the Scale Effect in Market-Based Accounting Research,” Journal of Business Finance & Accounting, 30(1-2), p.25-56.
31. Fama, E. F., and K. R. French(1993), “Common Risk Factors in the Returns on Stocks and Bond,” Journal of Financial Economics, 33(1), pp.3-56.
32. Fisher, K. L., and M. Statman(2003), “Consumer Confidence and Stock Returns,” Journal of Portfolio Management, 30(1), pp.115-127.
33. Fiske, S. T., and S. E. Taylor(1991), “Social Cognition (2nd edition),” New York, McGraw Hill.
34. Frazzini, A., and O. A. Lamont(2008), “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns,” Journal of Financial Economics, 88(2), pp.299-322.
35. Gerard, X., R. Guido, and C. Koutsoyannis(2009), “A Tale of Two Strategies: Cash Flows, Accruals and the Role of Investor Sentiment”, working paper.
36. Hermann, D., T. Inoue, and W. Thomas(2003), “The Sale of Assets to Manage Earnings in Japan,” Journal of Accounting Research, 41(1), pp.89-108.
37. Hribar, P., and J. McInnis(2012), “Investor Sentiment and Analysts’ Earnings Errors,” Management Science, 58(2), pp.293-307.
38. Huang, R., and C. Y. Shiu(2009), “Local Effects of Foreign Ownership in and Emerging Financial Market : Evidence from Qualified Foreign Institutional Investors in Taiwan,” Financial Management, 38(3), pp.567-602.
39. Kahneman, D., and A. Tversky(1973), “On the Psychology of Prediction,” Psychological Review, 80(4), pp.231-251.
40. Kahneman, D., and A. Tversky(1979), “Prospect Theory: An Analysis of Decision under Risk,” Econometrica: Journal of the Economic Society, pp.263-291.
41. Kaplanski, G., and H. Levy(2010), “Sentiment and Stock Prices: The Case of Avitation Disasters,” Journal of Financial Economics, 95(1), pp.174-201.
42. Kim, J. G., J. S. Seo, and B. C. Kim(2006), “The Value Relevance of Operating Income, Ordinary Income, Net Income and Comprehensive Income: Relative and Incremental Information Contents,” Journal of Accounting, Tax, and Audit Review, 44, pp.89-117.
43. Kim, J. S., D. J. Ryu, and S. W. Seo(2015), “Coporate Vulnerability Index as a Fear Gague? Exploring the Contagion Effect between U.S. and Korean Markets,” Journal of Derivatives, 23(1), pp.73-88.
44. Kim, W. S., and H. J. Bae(2014), “Decision Making for Asset Disposal on the Operating Performance,” Accounting Information Review, 32(4), pp.229-251.
45. Kumar, A., and C. Lee(2006), “Retail Investor Sentiment and Return Comovements,” The Journal of Finance, 61(5), pp.2451-2486.
46. Kwon, S. Y., and S. H. Lee(2000), “Earnings Management and Disposal of Asssets”, working paper, pp.201-222.
47. Lee, C., A. Shleifer, and R. Thaler(1991), “Investor Sentiment and the Closed-End Fund Puzzle,” The Journal of Finance, 46(1), pp.75-109.
48. Lemmon, M., and E. Portniaguina(2006), “Consumer Confidence and Asset Prices: Some Empirical Evidence,” Review of Financial Studies, 19(4), pp.1499-1529.
49. Lev, B.(1983), “Some Economic Determinants of Time-Series Properties of Earnings,” Journal of Accounting and Economics, 5, pp.31-48.
50. Livnat, J., and C. Petrovits(2009), “Investor Sentiment, Post-Earnings Announcement Drift, and Accruals,” working paper.
51. Lord, C., L. Ross, and M. Lepper(1979), “Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence,” Journal of Personality and Social Psychology, 37(11), pp.2098-2109.
52. Malkiel, B.(1990), “A Random Walk Down Wall Street,” W. W. Norton, 1999.
53. Menkhoff, L., and R. Robitzky(2008), “Investor Sentiment in the US Dollar: Longer-Term, Nonlinear Orientation PPP,” Journal of Empirical Finance, 15, pp.455-467.
54. Mian, G. M., and S. Sankaraguruswamy(2012), “Investor Sentiment and Stock Market Response to Earnings News,” The Accounting Review, 87(4), pp.1357-1384.
55. Nisbett, R., and L. Ross(1980), “Human Inference: Strategies and Shortcomings of Social Judgement,” Prentice-Hall.
56. Odean, T.(1999), “Do Investors Trade Too Much?” American Economic Review, 89(5), pp.1279-1298.
57. Ohlson, J.(1995), “Earnings, Book Values, and Dividends in Security Valuation,” Contemporary Accounting Research, 11(2), pp.689-731.
58. Park, H. S.(2001), “Earnings Management Using Gains on Real Estate Sales,” Korean Accounting Review, 26(1), pp.87-104.
59. Park, J. H.(2005), “Consumer Confidence, Investor Sentiment and Stock Returns,” Korean Journal of Money and Finance, 10(2), pp.199-224.
60. Park, S. R.(2016), “Investor Sentiment and the Market Pricing of Corporate Earnings,” Korean Accounting Journal, 25(1), pp.117-149.
61. Ryu, D. J., D. W. Ryu, and H. J. Yang(2018), “Investor Sentiment and Firm Characteristics: Domestic Evidence,” The Korean Journal of Finance Association, 31(1), pp.1-38.
62. Schmeling, M.(2009), “Investor Sentiment and Stock Returns: Some International Evidence,” Journal of Empirical Finance, 16(3), pp.394-408.
63. Shleifer, A.(2000), “Inefficient Markets: An Introduction to Behavioural Finance,” Oxford University Press.
64. Siegel, J.(1992), “The Equity Premium: Stock and Bond Returns since 1802,” Financial Analysts Journal, 48(1), pp.28-38.
65. Simpson, A.(2013), “Does Investor Sentiment Affect Earnings Management?” Journal of Business Finance & Accounting, 40(7-8), pp.869-900.
66. Sloan, R.(1996), “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” The Accounting Review, 71(3), pp.289-315.
67. Wang, G.(2018), “The Differential Impact of Investor Sentiment on the Value Relevance of Book Value versus Earnings,” International Journal of Critical Accounting, 10(6), pp.462-490.
68. Yang, C., and B. Gao(2014), “The Term Structure of Sentiment Effect in Stock Index Futures Market,” North American Journal of Economics and Finance, 30, pp.171-182.
69. Yang, C., and R. Zhang(2014), “Does Mixed-Frequency Investor Sentiment Impact Stock Returns? Based on the Empirical Study of MIDAS Regression Model,” Applied Economics, 46(9), pp.966-972.
70. Yang, C., and L. Zhou(2015), “Investor Trading Behavior, Investor Sentiment and Asset Prices,” North American Journal of Economics and Finance, 34, pp.39-53.
71. Yang, C., and L. Zhou(2016), “Individual Stock Crowded Trades, Individual Stock Investor Sentiment and Excess Returns,” North American Journal of Economics and Finance, 38, pp.132-147.
72. Yoo, Y. K., B. Y. Moon, and E. S. Choi(2013), “Relative Value Relevance of Operating Income under K-IFRS vs K-GAAP,” Korean Accounting Journal, 22(2), pp.1-21.
73. Zweig, M.(1973), “An Investor Expectations Stock Price Predictive Model Using Close-End Fund Premiums,” Journal of Finance, 28(1), pp.67-87.

∙ The author Jeong-han Baek is an assistant professor of Business administration at Dongguk University(Gyeongju). He graduated from Pusan National University(PNU) with a degree in business administration and obtained a master’s and doctorate degrees from the PNU. The main areas of interest in research include value relevance, earnings management, and goodwill accounting.

∙ The author Young-min Kwak is an associate professor of Accounting at Ulsan University. He graduated from Pusan National University(PNU) with a degree in department of Economics and obtained a master’s and doctorate degrees from the PNU. The main areas of interest in research include corporate governance, value relevance, earnings management, and corporate social responsibility.