Stock Returns and the Tone of Marketplace Information: Does Context Matter?

Document Type

Article

Publication Date

1-3-2018

Publication Title

Journal of Behavioral Finance

DOI

10.1080/15427560.2018.1405268

ISSN

1542-7579

Abstract

The author provides empirical evidence that marketplace context matters for understanding stock price behavior. Investor sentiment, as measured by the informational tone of stock market reports from the Wall Street Journal and Bloomberg News outlets, is compared across 2 classification dictionaries: the Harvard General Inquirer IV-4 dictionary and the financial context-specific dictionary of Loughran and McDonald [2011 Loughran, T., and B. McDonald. “When Is a Liability Not a Liability? Textual Analysis, Dictionaries and 10-Ks.” Journal of Finance, 66, (2011), pp. 35–65.[Crossref], [Web of Science ®], [Google Scholar]]. Empirical analyses find a negative relationship between measures of investor pessimism and real stock returns. However, this relationship is strongest and statistically significant only for the context-specific measures. The results suggest that investor sentiment based on contextualized information is able to explain medium- to longer-term swings in aggregate stock prices. This, in turn, implies that investor interpretation of stock market information may not unfold in mechanical ways.

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