Investor Sentiment and Stock Market Response to Earnings Announcement

This paper explores the relation between investor sentiment and stock price response to earnings news in China mainland stock market employing the method of event study. The evidence demonstrates that stock price response to earnings news with the prevailing sentiment, that is, investor sentiment is systematically related to the market response to corporate earnings announcement news. The empirical result also shows stock market respond to corporate earnings announcement news asymmetrically when sentiment is pessimistic. The findings not only help us understand the rationality of stock market response to news, but also show that stock market misreaction to news could be an important channel for the sentiment-drive mispricing of stocks.