Investors' sentiment and accruals anomaly: European evidence

Purpose The purpose of this paper is to examine whether investors' sentiment affects accruals anomaly across European countries. Design/methodology/approach The authors estimate the model using Fama-MacBeth regressions. The sample includes 54,572 firm-year observations for 4,787 European firms during the period 1994-2014. Findings The authors find that investors' sentiment influences accruals mispricing across European countries. The effect is pronounced for stocks whose valuations are highly subjective and difficult to arbitrage. The cross-country analysis provides evidence that sentiment influences accruals anomaly in countries with weaker outside shareholder rights, lower legal enforcement, lower equity market development, higher allowance of accrual accounting and in countries where herd-like behavior and overreaction behavior are strong. Research limitations/implications The findings suggest the generalizability of the sentiment-accruals anomaly relation in European countries characterized by different cultural values, levels of economic development and legal tradition. Practical implications The findings suggest to caution individuals investors. These investors would be wise to take into account the impact of sentiment on the performance of their portfolio. They must keep in mind that periods of high optimism are accompanied by a high level of accruals and followed by low future stock returns. Originality/value The research supplements previous American studies by showing the significance of the level of sentiment in understanding the accruals anomaly in Europe. Hence, it is important for future studies to consider investor sentiment as an important time-series determinant of the accruals anomaly, particularly for stocks that are hard to value and difficult to arbitrage.