Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals
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Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals Yiannis Karavias1 · Stella Spilioti2 · Elias Tzavalis2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We investigate the existence of evidence of investor sentiment on share price deviations from their intrinsic values across two sentiment regimes of shares market: the low-tonormal and the excess one. We use the residual income valuation model to calculate the intrinsic values of shares based on accounting fundamentals and we suggest a panel data threshold model to capture the sentiment regimes of the market, using as threshold variable alternative investor sentiment indices. The suggested model enables us, first, to endogenously identify from the data the threshold value of a sentiment index triggering market sentiment regime shifts and, based on it, to examine if the effects of investor sentiment on share prices across the above two sentiment regimes are in accordance to the theory. Application of the model to UK data shows that investor sentiment influences positively share prices in the low-to-normal and negatively in the excess one. We also show that investor sentiment dominates risk premium effects on shares characterized by low book-to-market, and dividend- and earnings-to-price ratios. The above results are consistent with the predictions of the sentiment hypothesis. Keywords Asset pricing · Investor sentiment · Risk premium · Assymetric effects · Cointegration · Threshold regression
The authors would like to thank George Constantinides, Theodore Sougiannis, Vassilis Sogiakas, and the participants of the 12th CEF -BMRC Conference on Macro and Financial Economics, 2016, Brunel University, London and the 22nd International Panel Data Conference, Curtin University, Perth for their helpful comments and suggestions. Stella Spilioti acknowledges financial support from the Research Center of Athens University of Economics and Business under the Grant No. EP-11268001. * Elias Tzavalis [email protected] Yiannis Karavias [email protected] Stella Spilioti [email protected] 1
University of Birmingham, Birmingham, UK
2
Athens University of Economics and Business, Athens, Greece
13
Vol.:(0123456789)
Y. Karavias et al.
JEL Classification G12 · G14 · G15
1 Introduction There is a long debate in the finance literature over whether investor sentiment, such as excessive optimism, fears and moods, affect significantly share returns and/or prices (see Statman 2011, for a survey).1 According to the sentiment hypothesis, deviations of share prices from their fundamental values should reflect behavioral investor attitudes (i.e., psychological factors) which influence investors’ reaction to market and/or company information. These attitudes tend to lead to overpriced, or underpriced, shares, depending on the sentiment level (or regime) of shares market. In particular, the sentiment hypothesis predicts that abrupt adjustments of share prices to their intrinsic values
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