Managerial Sentiment Research Articles

Does sentiment affect capital structure decisions

Purpose- This study aims to investigate whether investor and managerial sentiment have an effect on capital structure decisions of manufacturing firms listed on Borsa Istanbul between 2010 and 2017. This study contributes to the existing literature by including sentiment as a determinant of capital structure in the analysis as well as differentiating between investor and managerial sentiment. Methodology- To test for the relationship, Consumer Confidence Index and Real Sector Confidence Index are used to proxy for investor sentiment and managerial sentiment, respectively. Quarterly financial statements of manufacturing firms are used to collect firm specific and capital structure data for the period from 2010 to 2017. Panel data framework is employed to analyze the relationship between firm specific variables and sentiment, and leverage level of the firms. Findings- Statistically significant negative relationship is determined between investor sentiment and total leverage; and managerial sentiment and total leverage of the firms at 1% level. Hence, when sentiment goes up, representing optimism, debt level of firms goes down. Conclusion- Our findings may be explained by the Market Timing Theory which argues that equity financing is preferred by managers when the stocks of the firm are overvalued on the market. Hence, when the market has an optimistic view, measured by investor sentiment, the firms have higher levels of equity financing which lends support to this argument. The findings also support the claim that individual perceptions are influential in the decision-making process. Managers as individuals, also prefer equity financing when they are optimistic, proxied by managerial sentiment.

Firms' confidence and Okun's law in OECD countries

Based on panel quarterly data regarding fifteen OECD countries for the period from 2001 to 2016, we provide empirical evidence for the relationship between firms' confidence and Okun's coefficient. In particular, we analyze if changes (updates) and persistent changes of firms' confidence have different implications for the Okun's coefficient. Based on Business Confidence Index and Managerial Sentiment Indicator we build indicators for measuring updates of the firms' confidence and performed several regressions. The findings denote that updates of medium-term as well as persistent updates of the firm's confidence are able to change the link between unemployment and output growth.

Managerial Sentiment and Earnings Forecast Disclosure: Evidence From Changes in Japanese Government

This study constitutes an examination of the effects of political connectedness on management forecast revisions. Two types of management forecasts (e.g. sales revenue and net income) are examined by focusing on the change in the Japanese government. Using Japanese soft contribution data as a proxy for political connectedness, the main results show that firms that are politically connected to the Liberal Democratic Party are less (more) likely to revise sales revenue forecasts downwardly (upwardly) when the Liberal Democratic Party is the ruling party. Political connectedness is found to have few effects on forecast revisions of net income. Sensitivity tests using the amounts of soft political contributions and the propensity score matching model show results like the main ones. Furthermore, other properties of management forecasts (e.g. forecast innovation, forecast errors, and forecast accuracy) are also examined. The results show that firms with political power issue their initial sales revenue forecasts in a more aggressive, more biased, and less accurate manner than those without.

Posturing your firm for the future: considering environmental uncertainty and managerial sentiment

PurposeAll leaders must position their firms for future success. However, not all firms should search for information and craft their strategies in the same way. This paper aims to provide a framework, which suggests that firms should adopt different postures depending on extent of environmental uncertainty and whether leaders are optimistic or pessimistic about their firms’ abilities and futures.Design/methodology/approachThis framework was designed by two strategy professors based on both strategy theory and their experience working with and observing firms over many years.FindingsThe framework’s four postures – versatile (high uncertainty, positive sentiment), inquisitive (high uncertainty, negative sentiment), focused (low uncertainty, positive sentiment), and vigilant (low uncertainty, negative sentiment) – call for different behavior as firms seek to understand environmental trends and take strategic actions. The dangers of each posture are briefly discussed.Originality/valueThis paper provides a simple framework to help executives better understand how their firms should search for and implement strategic actions for future success.

Does managerial sentiment affect accrual estimates? Evidence from the banking industry

We examine whether managerial sentiment is associated with errors in accrual estimates. Using public banks we find (1) managerial sentiment is negatively associated with loan loss provision estimates, (2) future charge-offs per dollar of provision are positively associated with sentiment when the provision is estimated, and (3) the effects of sentiment are greater for firms with more uncertain charge-offs. Results are similar for private banks, suggesting accrual manipulation related to capital market incentives is unlikely to explain the results. Although economic fundamentals explain most of the variation in the provision, we find sentiment has an incremental and economically meaningful effect.

Managerial sentiment, consumer confidence and sector returns

This paper investigates the relationship between managerial sentiment and sector returns. Using UK monthly data from January 1985 to December 2014 and a sample of consumer and business confidence indicators provided by the European Commission, we provide novel evidence on how managerial and consumer sentiment indicators affect stock returns. We find no support for consumer confidence as a predictor of stock returns. However, managerial sentiment shows a significant impact on aggregate market and sector return indices. Furthermore, we find that parameter estimates for sector groupings are not consistent, implying that the sentiment-return relationship differs across sectors. We also find parameters are sensitive to industry characteristics. Importantly, the overall sentiment-return relationship is dominated by sentiment associated with manufacturing firms.

Does Managerial Sentiment Affect Accrual Estimates? Evidence from the Banking Industry

Defining managerial sentiment as managers’ beliefs about future firm outcomes that are unjustified by the information available to them, we hypothesize and find that managerial sentiment is associated with unintentional errors in accrual estimates. Using a sample of public banks, we find that: (1) managerial sentiment is negatively associated with loan loss provision estimates; (2) loan loss provision estimates made in periods of higher (lower) sentiment are associated with more (less) future charge-offs; and (3) the effects of sentiment are greater for firms with more “uncertain” or more “difficult-to-predict” charge-offs. We find the same results using a sample of private banks, suggesting that the bias in the provision estimates is unintentional, as opposed to strategic. These results are robust to firm-level determinants of loan loss provisions, macroeconomic variables found to affect either loan loss provisions or measures of sentiment, and multiple proxies for managerial sentiment. We contribute to the literature by documenting evidence on how unintentional biases linked with managerial sentiment influence financial reporting decisions.

What Explains IPOs of Closed-End Funds: Managerial Ability, Illiquidity, or Sentiment?

Why buy a closed-end fund at IPO, when it is likely to trade at a discount in a few months’ time? One theory suggests that buying a new fund is justified by an initial period of investment outperformance. A second theory is that new funds are launched to provide access to assets that are temporarily illiquid and to exploit the subsequent liquidity gain while a third theory asserts that buyers of new issues are not fully rational but are influenced by time-varying sentiment. This paper tests the three theories using data from UK-traded closed-end equity-fund IPOs over 1984 to 2006. The empirical results provide strong support for the influence of sentiment but provide little or no support for the two other theories.

European Capital Structures: Managerial Insight and Governance Regimes

We investigate the determinants of Capital Structure in Europe and we implement a novel approach focusing on the relevance of manager’s knowledge and behaviors for leverage ratios in aggregate. We show that this relevance is moderated by the governance structure of firms. Specifically we show that firms with concentrated-ownership exhibit a negative relation between managerial sentiment and both measures of leverage (market and book leverages) while firms with dispersed ownership exhibit a positive relation to market leverage only (no relation is obtained on medium-range firms). We further show that other dimensions relating to transparency, size & prominence moderate the relationship. Our contribution extends to debates on agency and corporate governance. We emphasize the practical importance between two dominant views of agency: managers vs. shareholders and control-holders vs. minority shareholders. While illustrating this relevance, we suggest that different governance structures, that is, different kinds of agency conflicts, lead to different managers’ behaviors in aggregate and different market valuation of these behaviors. An implication is that a normative assessment of managerial action may depend on the underlying governance regime.