Corporate Events and Stock Price Reactions: The Impact of Investor Sentiment

Abstract

This thesis studies the impact of firm-specific investor sentiment on stock price reactions to events; earnings surprises, dividend changes, and credit rating changes. The first empirical chapter establishes that firm-specific investor sentiment is a key determinant of price adjustment in the context of an earnings surprise. This chapter demonstrates that the price impact of firm-specific investor sentiment is not moderated by market-wide investor sentiment; and it is greater for firms announcing negative earnings surprises and firms facing uncertainty in valuation. Further, this chapter provides evidence of mispricing and return reversals over the days following earnings surprises. The second empirical chapter investigates the impact of firm-specific investor sentiment on stock price responses to dividend changes. This chapter establishes that bullish investor sentiment moderates the negative price impact of a decrease in dividends. It suggests that the moderating impact of bullish investor sentiment is most marked for hard to value and difficult to arbitrage firms. Furthermore, it highlights that the impact of bullish investor sentiment is temporary as it reverses in a short period following dividend change announcements. The third empirical chapter explores the role of firm-specific investor sentiment in stock price formation around credit rating changes. This chapter provides evidence that investor sentiment has a significant impact on stock price responses to rating downgrades. It shows that the price impact of investor sentiment is most pronounced for speculative-grade firms and firms experiencing direct rating downgrades. Moreover, it indicates that mispricing due to the impact of investor sentiment reverses over the post-announcement period. Overall, the findings of this thesis provide strong evidence that investor sentiment towards individual firms plays an important role in stock pricing around corporate events.