Investor Sentiment, Post-Earnings Announcement Drift, and Accruals

Abstract

We examine whether stock price reactions to earnings surprises and accruals vary systematically with investor sentiment. Using quarterly drift tests and monthly trading strategy tests, we find that holding good news firms (and low accrual firms) following pessimistic sentiment periods earns higher abnormal returns than holding good news firms (and low accrual firms) following optimistic sentiment periods. We also document that abnormal returns in the short-window around earnings announcements for good news firms are higher during periods of low sentiment. Overall, our results indicate that investor sentiment influences the source of excess returns from accounting-based trading strategies.