The differential impact of investor sentiment on the value relevance of book value versus earnings

Abstract

This study investigates the impact of investor sentiment on the allocation of investor attention across different information sources. Specifically, I examine 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 relative to high sentiment periods, and conversely that the value relevance of earnings is higher during high sentiment relative to low sentiment periods. 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. This study also provides empirical evidence for the 'limited attention' theory suggested by psychology research by showing that investor skepticism leads to their placing greater emphasis on financial statement information.