Investor Sentiment And Post-Earnings Announcement Drift

Post-earnings announcement drift is important anomaly in capital market. Behavioral finance scholars have explained this market anomaly mainly from perspective of investor types, inattention and opinion divergence of investors. However, rare literatures focus on the impact of investor sentiment on post-earnings announcement drift. Investor sentiment is systematic bias of future expectation from investors and significant factor of security pricing.This paper selects public companies from2008to2012in main board with quarterly earnings announcement disclosed, sentiment composite index is derived from principal component analysis to empirically investigate the impact of investor sentiment on post-earnings announcement drift. The results indicate that firstly, there is upward drift following good news and downward drift following bad news, thus significant post-earnings announcement drift exists in China capital market. Secondly, investor sentiment significantly affects post-earnings announcement drift, comparing with optimistic sentiment periods, upward drift following good news is greater for pessimistic sentiment periods, and comparing with pessimistic sentiment periods, downward drift following bad news is greater for optimistic periods. Thirdly, according to arbitrage strategy analysis, significantly cumulative abnormal returns can be obtained through buying highest portfolios including stocks of extreme good news and selling lowest portfolios including stocks of extreme bad news.One unique feature of this paper is that it explains post-earnings announcement drift from the direction of investor sentiment, extending the literature on post-earnings announcement drift. Another unique feature is that it reveals the mechanism of impact from investor sentiment on asset pricing. The results of this study can provide investor with efficient arbitrage investment strategy portfolio.