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Investor Sentiment and Corporate Disclosure

Authors

  • NITTAI K. BERGMAN,

    1. MIT Sloan School of Management; We are grateful to our editor, Ray Ball, and an anonymous referee for their comments. We also thank S. P. Kothari, Ross Watts, Richard Frankel, Paul Asquith, Malcolm Baker, Dirk Jenter, Leonid Kogan, Jon Lewellen, Jeremy Stein, J. P. Weber, and seminar participants at MIT, University of Southern California, Washington University, and Boston College for their helpful suggestions.
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  • SUGATA ROYCHOWDHURY

    1. MIT Sloan School of Management; We are grateful to our editor, Ray Ball, and an anonymous referee for their comments. We also thank S. P. Kothari, Ross Watts, Richard Frankel, Paul Asquith, Malcolm Baker, Dirk Jenter, Leonid Kogan, Jon Lewellen, Jeremy Stein, J. P. Weber, and seminar participants at MIT, University of Southern California, Washington University, and Boston College for their helpful suggestions.
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ABSTRACT

This paper investigates how firms react strategically to investor sentiment via their disclosure policies in an attempt to influence the sentiment-induced biases in expectations. Proxying for sentiment using the Michigan Consumer Confidence Index, we show that during low-sentiment periods, managers increase forecasts to “walk up” current estimates of future earnings over long horizons. In contrast, during periods of high sentiment, managers reduce their long-horizon forecasting activity. Further, while there is an association between sentiment and the biases in analysts' estimates of future earnings, management disclosures vary with sentiment even after controlling for analyst pessimism, indicating that managers attempt to communicate with investors at large, and not just analysts. Our study provides evidence that firms' long-horizon disclosure choices reflect managers' desire to maintain optimistic earnings valuations.

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