Abstract
We find that investor sentiment restrains the predictability of earnings news on announcement returns but the constraining effect of sentiment on the predictive power of earnings news diminishes as sentiment falls. We document that investor attention works as an important channel in the relation between investor sentiment and announcement returns. Investor attention enhances the immediate price reaction to earnings news by curbing the impact of sentiment on the predictive power of earnings news. Our findings reflect the joint effect of attention and sentiment on the source of excess returns documented in the prior earnings-based market anomaly literature.
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