Investor and Managerial Sentiment and Stock Returns: An Integrative Literature Review of the Evidence, Measurement Approaches, and Emerging-Market Research Agenda

Investor sentiment is increasingly becoming a major topic of discussion and analysis within behavioral finance. It is regarded as a key driver of market growth. On the same note, management sentiment as manifested in its communications – along with its tone – convey hidden information about the overall business and market outcomes in the future, according to recent studies. The point of contention, however, is not whether investor and management sentiments, because they have, but rather, that each was studies separately. The existing studies on investor sentiments focus on markets and exchanges in terms of behaviors and beliefs. Current literature on management sentiments focuses on discourse, actual utterances, managerial biases, and communication content. Since the research on the field studies each discipline separately, the present paper attempts to connect both disciplines and review any evidence on any relationships they may have with return on investment particularly, in connection with stocks. For that purpose, the review is structured around answering four research questions: how is investor sentiment related to stock returns? Does managerial sentiment or tone contain information concerning future returns? How are the two forms of sentiment measured? Does investor sentiment change the way markets interpret managerial communication, particularly in emerging markets? The findings of the review suggest that market outcomes are connected to investor sentiment and managerial tone. Investor sentiment is a direct driver of stock market outcomes, subject to the way such sentiment has been revealed and the nature of investor, in addition to the details related to the market itself and research design. Management tone is perceived in two contrasting manners, relevant to the surrounding relations: managerial overoptimism is seen as denoting negative future outcomes which in turn require corrective measures; and effective and clear communication by management results in positive long-term outcomes. Either result is influenced by the tool of measurement for the tone or sentiment. Among the early tools were the traditional language dictionaries, before developing in more recent literature into the use of more complex and contextual language processing tools. Although more attention is given to investor and management sentiment analysis, emerging markets remain underrepresented in the literature. Egypt is a good example of this lack of representation, with limited literature on the interconnection between investor behavior and management tone. The concluding section of this review establishes an integrated conceptual framework and a research agenda for examining investor and managerial sentiments jointly in emerging markets, including the Egyptian Exchange

investor sentiment; managerial sentiment; managerial tone; stock returns; behavioral finance; textual analysis

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