The Differential Impact of Investor Sentiment on the Value Relevance of Book Value Versus Earnings

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This study investigates the differential role of investor sentiment on the value relevance of book value versus earnings. I predict and find that the value relevance of book value is higher during low sentiment periods relative to high sentiment periods, and that the value relevance of earnings is higher during high sentiment periods relative to low sentiment periods. These findings are consistent with investors ― when optimistic ― placing a higher weight on earnings, which implies expected future earnings, whereas investors ― when pessimistic ― place a higher weight on book value, which is a conservative estimation of current value. Additional analyses suggest that this sentiment effect is more pronounced for book value components that are closely related to abandonment value, and for earnings components that have strong indication of future earnings (specifically, permanent earnings). Results are also robust to alternative measures of investor sentiment.