Manager Sentiment Bias and Stock Returns: Evidence from China

ABSTRACT

Using textual analysis of Chinese listed firms from 2004 to 2017, we examine the role that managers’ sentiment plays in financial disclosures and its impact on firms’ future stock returns. We distinguish manager sentiment as either signal or noise according to its consistency with firm earnings. We find that good signal sentiment positively impacts stock returns, whereas bad signal sentiment and noisy sentiment that reflects overconfidence negatively impact stock returns. Further analysis shows that external supervision, internal control, and managers’ expertise contribute to improving the information quality of both signal and noisy sentiments, and the enactment of earnings forecast policy helps strengthen the signaling impact of manager sentiment.

KEYWORDS:

• Manager sentiment
• stock returns
• textual analysis
• signal sentiment
• noisy sentiment

JEL:

• C53
• G11
• G12
• G17

Notes

1. Different from other databases, the CNINFO website provides the full text of financial statements and earnings forecasts from listed firms so that we can accurately estimate the aggregated textual tone of firms’ financial disclosures. The website is www.cninfo.com.cn.

2. The publicly available files of earnings forecasts started from 2004.

3. The Jieba Tokenizer is mainly suitable for Chinese articles.

4. NTUSD is the National Taiwan University Semantic Dictionary, which is a set of highly influential and widely used word lists for business applications. The lists can classify these negative/positive words and better reflect tone in financial and accounting text for the Chinese sentiment researches.

5. The actual EPS of firm i increase means $\mathrm{\Delta }EP{S}_{i,t}>0$, $\mathrm{\Delta }EP{S}_{i,t}=actualEP{S}_{i,t}-actualEP{S}_{i,t-1}$.

Additional information

Funding

This work was supported by the the Natural Science Foundation of Guangdong Province, China [2016A030313094]; the Ministry of Education of Humanities and Social Science project, China [15YJA630004].