Measuring the Effect of Firm-Level Investor Sentiment on Liquidity and Financial Distress

Using pooled regressions, I evaluated the effect of firm-level investor sentiment derived from news and Twitter content on a firm’s share liquidity. The results indicate several key findings. (1) Improvements (deteriorations) in news sentiment lead to an increase (decrease) in share liquidity; however, improvements (deteriorations) in Twitter sentiment lead to decreases (increases) in share liquidity. (2) The effect of Twitter sentiment on share liquidity is greater than that of news sentiment. (3) The effect of Twitter sentiment on liquidity is stronger (weaker) when the news and Twitter sentiment polarity are the same (different). (4) The negative relationship between Twitter sentiment and share liquidity is highest for small-sized firms, and is also present for large firms; however, mid-sized firms exhibit a slight positive relationship between Twitter sentiment and liquidity. On the other hand, the positive relationship between news sentiment and liquidity is driven by small- and mid-sized sized firms, whereas large firms exhibit a negative relationship between news sentiment and share liquidity. Additionally, using a beta-regression, I evaluated the effect of sentiment derived from news and Twitter content on a firm’s financial distress. The analyses yielded several significant results. (1) Investor firm-level sentiment derived from both news and Twitter media content is negatively related to a firm’s financial distress, where increases (decreases) in news and Twitter sentiment reduce (increase) the firm’s financial distress. (2) The effect of sentiment derived from Twitter on a firm’s financial distress is significantly stronger than the effect of sentiment derived from news articles. (3) Financial distress is lowered (increased) when the polarity of investor sentiment taken from firm-specific news and tweets are the same (different). (4) Increases (decreases) in the news sentiment result in a more significant decrease (increase) in a firm’s financial distress for firms that are harder to value. By establishing a relationship between firm-level investor sentiment and a firm’s share liquidity and financial distress, the study adds to the behavioral finance research and shows that firm-level sentiment information derived from news and Twitter media content can help market participants in their decision making.

Grantor dc:publisher

Creighton University

Year dc:date.issued

2020

Author dc:creator

• Garcia, John

Advisor dc:contributor.advisor

• Dunham, Lee

Statement dc:rights

• Copyright is retained by the Author. A non-exclusive distribution right is granted to Creighton University and to ProQuest following the publishing model selected above.

Language dc:language.iso

en_US

Handle dc:identifier.uri

http://hdl.handle.net/10504/126579

OAI identifier oai:identifier

oai:cdr.creighton.edu:10504/126579