Investor Sentiment and Earnings Response Coefficient (ERC)

In previous studies, the informational content of accounting variables was examined under conditions of the classic assumptions of economics and finance, that such a framework does not provide an insight on the effects of irrational behaviors of investors. However, theoretical literature and the results of recent empirical studies suggest that feelings of investors can affect their response to accounting information and evaluation of companies' stock. Given the evidence of previous studies on the difference between the reactions to the accounting earnings news, the effect of investors' tendencies on the estimation of the coefficient of reaction to the accounting earnings and each of its components are examined empirically in this study. Based on the data of 100 listed companies in Tehran Stock Exchange between the years 2010 and 2017, the results show that current and future earnings have a positive and significant effect on stock returns, but investors' tendencies can decrease the coefficients of response to current earnings. Further investigations suggest the negative effect of investors' tendencies on the coefficient of cash and accrual components of future earnings reflected in current stock returns.