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Title

How Does Post-Earnings Announcement Sentiment Affect Firms' Dynamics? New Evidence from Causal Machine Learning.

Authors

Audrino, Francesco; Chassot, Jonathan; Huang, Chen; Knaus, Michael; Lechner, Michael; Ortega, Juan-Pablo

Abstract

We revisit the role played by sentiment extracted from news articles related to earnings announcements as a driver of firms' return, volatility, and trade volume dynamics. To this end, we apply causal machine learning on the earnings announcements of a wide cross-section of U.S. companies. This approach allows us to investigate firms' price and volume reactions to different types of post-earnings announcement sentiment (positive, negative, and mixed sentiments) under various underlying macroeconomic, financial, and aggregated investors' moods in a properly defined causal framework. Our empirical results support the presence of (i) economically sizable differences in the effects among sentiment types that are mostly of a non-linear nature depending on the underlying economic and financial conditions; (ii) a leverage effect in sentiment where reactions are (on average) larger for negative sentiment; and (iii) investors' underreaction to news. In particular, we show that the difference in the average causal effects of the sentiment's types is larger and more relevant when the general macroeconomic conditions are worse, the investors are pessimist about the behavior of the market and/or its uncertainty is higher, and in market regimes characterized by high stocks' liquidity.

Subjects

EARNINGS announcements; MACHINE learning; INVESTORS; BUSINESS enterprises; ANNOUNCEMENTS; PRICES

Publication

Journal of Financial Econometrics, 2024, Vol 22, Issue 3, p575

ISSN

1479-8409

Publication type

Academic Journal

DOI

10.1093/jjfinec/nbac018

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