International Journal of Behavioural Accounting and

Finance

ISSN online: 1753-1977 - ISSN print: 1753-1969

https://www.inderscience.com/ijbaf

The influence of investor sentiment on stock prices among

industries in the US

Tantatape Brahmasrene, Donna Whitten

DOI: 10.1504/IJBAF.2022.10048146

Article History:
Received: 21 May 2021
Accepted: 27 November 2021
Published online: 21 November 2022

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Int. J. Behavioural Accounting and Finance, Vol. 6, No. 4, 2022 281

The influence of investor sentiment on stock prices

among industries in the US

Tantatape Brahmasrene* and Donna Whitten

College of Business,
Purdue University Northwest,
1401 S. U.S. 421, Westville,
Indiana, 46391, USA
Email: tapeb@pnw.edu
Email: dlwhitte@pnw.edu
*Corresponding author

Abstract: Research has shown that company-specific fundamental valuation

factors impact stock prices, including diluted earnings (DEPS), book value
(BV), and dividends (DIV) on a per-share basis. Free cash flow (FCF) has also
been investigated, albeit not as extensively. Recently, investor sentiment, a
behavioural factor, has been studied. Using the ordinary least square (OLS)
method, this study explores the impact of company-specific fundamental
valuation factors on stock prices of firms in significant industries in the US, for
which investor sentiment is statistically significant. The results indicate that the
industry variable is significant in the stock price. Further, investor sentiment,
specifically whether it is optimistic or pessimistic, is significant in two
industries, finance and manufacturing. Finally, the significance of the valuation
factors differed based on investor optimism, for which all included variables
are significant, and investor pessimism, for which only earnings-based factors
are significant in the finance sector but not in manufacturing.

Keywords: investor sentiment; psychological factors; stock price; diluted

earnings; book value; dividends; free cash flow; FCF.

Reference to this paper should be made as follows: Brahmasrene, T. and

Whitten, D. (2022) ‘The influence of investor sentiment on stock prices among
industries in the US’, Int. J. Behavioural Accounting and Finance, Vol. 6,
No. 4, pp.281–295.

Biographical notes: Tantatape Brahmasrene is a Professor of Finance and

International Business at Purdue University Northwest (PNW), a 2001
J. William Fulbright Senior Scholar, Fulbright Senior Specialist in
Turkmenistan (2015), Kazakhstan (2007) and Thailand (2003). He holds a MA,
PhD (University of Cincinnati), MS (Indiana State University), CFP (1991) and
ChFC (1992). He was the recipient of ten Best Paper Awards from international
conferences between 2002 and 2019, Academy of Educational Leadership
Outstanding Educator Award and the 1997–1998 PNW Outstanding Teacher.
His co-authored paper in Tourism Management (2013) has been selected as a
winning paper in the Emerald Citations of Excellence for 2016.

Donna Whitten is an Associate Professor of Accounting at Purdue University

Northwest. She earned a BS in Management and Accounting from Purdue
University Calumet, an MBA from Indiana University Northwest, and a PhD
from Indiana University, USA. In addition, she is a licensed CPA in the State
of Indiana. She teaches accounting courses in the BS in Accounting.

Copyright © 2022 Inderscience Enterprises Ltd.

282 T. Brahmasrene and D. Whitten

She has published several papers in peer-reviewed journals. Her interests in

research lies in the areas of accounting topics, including cash flows, effective
teaching methods, and mentoring. In addition, she remains active in the field
through consulting.

1 Introduction

Fundamental analysis of a stock’s intrinsic value utilises information specific to a

particular company, such as earnings, book value, dividends, and cash flows (Chavan and
Patil, 2013). These valuation factors have been well studied and while some variances
exist, they have been shown to have an effect on stock price. Macroeconomic factors
such as exchange rates, consumer price index, inflation, and unemployment rates have
also been shown to influence stock markets (Azar, 2014; Jasra et al., 2012; Ozlen, 2014).
While important, these rational type factors are not the only category of influence on
stock values. Physiological factors also play a role (Chavan and Patil, 2013).
The field of behavioural finance is an area of research that seeks to explain investor
behaviour from a social science perspective (Kourtidis et al., 2015; Lopez-Cabarcos et
al., 2019). Several areas of interest have emerged. For example, studies have been
conducted to explore calendar-based return patterns (Khan et al., 2017; Rossi and
Fattoruso, 2017). This behaviour, if significant, would violate the efficient market
hypothesis. The results have varied. A paper by Rossi and Gunardi (2018) focused on
several European countries and displayed a lack of significance, while Khan et al. (2017)
noted a small positive impact in Pakistan during Ramadan. Another area of interest, and
the focus of this paper, is investor sentiment, which involves the attitude of investors
toward a firm’s stock, based on factors other than fundamental valuation factors (Baker
and Wurgler, 2007). While an established area of study, a precise agreed upon measure of
optimism continues to be explored (Baker and Wurgler, 2006). This study examines the
effect of investor sentiment on stock price, by industry, for companies in the US. Further,
investor sentiment is explored for firms that investors display optimism vs. pessimism.
Included are traditional fundamental valuation factors, DEPS, BV, DIV, and FCF, to
explore their significance, by industry, under both positions of investor sentiment,
optimism and pessimism.

2 Literature review and hypotheses

Early studies of financial markets focused on models that relied on informed rational
investors (Grossman and Stiglitz, 1980; Townsend, 1983). Subsequent studies identified
fundamental valuation factors. These included, among other things, diluted earnings per
share or DEPS (Alam et al., 2016; Bepari et al., 2013; Warrad, 2017), book value per
share or BV (Alam et al., 2016; Bepari et al., 2013; Sharif et al., 2015), dividends
per share or DIV (Sharif et al., 2015; Warrad, 2017), and free cash flow (FCF) per share
or FCF (Asif et al., 2016; Bepari et al., 2013; Kumar and Krishnan, 2008; Oroud et al.,
2017; Tahat and Alhadab, 2017).
 The influence of investor sentiment on stock prices among industries in the US 283

The sector, or industry, has also been researched, mostly focusing on macroeconomic
factors (Hong et al., 2007; Ponka, 2017). These include exchange rates, consumer price
index, interest rates (Jasra et al., 2012), unemployment rates, and current account deficits
(Ozlen, 2014) among others. However, although these factors remain important
determinants of stock price, these models failed to explain many stock market events and
researchers began to look at behavioural factors to provide an enhanced alternative
(De Long et al., 1990). What emerged is a rich body of literature reflecting the empirical
impact of a construct generally referred to as investor sentiment.

2.1 Fundamental valuation factors of stock price

One of the most consistently significant valuation factors in terms of stock price is DEPS.
Studies conducted in numerous countries, under differing economic conditions, and
various industries report this variable as statistically significant (Alam et al., 2016; Bepari
et al., 2013; Kumar and Krishnan, 2008; Tahat and Alhadab, 2017). However, under
some conditions, such as emerging markets in Bahrain (Sharif et al., 2015) and Jordanian
banks (Warrad, 2017), it has been found to be insignificant.
Another primary valuation factor is BV. Many, but not all, of the same studies that
noted statistical significance for DEPS also reported BV as consistently statistically
significant. Alam et al. (2016), Bepari et al. (2013), Tahat and Alhadab (2017) and
Warrad (2017). However, even this basic financial measure was at times insignificant
(Musallum, 2018).
Many studies have investigated DIV for its impact on stock price, with most reporting
positive significance (Margaretha and Firzitya, 2015; Osundina et al., 2016; Warrad,
2017). Yet, Sharif et al. (2015) noted a negative impact on stock price in the developing
market in Bahrain. Finally, a study of firms in Qatar reported DIV was not statistically
significant (Musallum, 2018).
Cash flows, and specifically FCF, has received somewhat less attention in the
literature as a determinant of stock prices than the factors previously discussed. When
included, FCF was mostly positively significant (Asif et al., 2016; Bepari et al., 2013;
Kumar and Krishnan, 2008; Oroud et al., 2017; Tahat and Alhadab, 2017). However, its
significance varied by country and possibly by accounting reporting standard (Whitten
and Brahmasrene, 2019). Based on the differing results regarding traditional valuation
factors in studies involving stock price determinants, further research continues to add to
the literature.

2.2 Industry factors

The impact of industry on stock prices includes a number of differently focused studies.
One area of research involves the ability of certain industries to predict market returns. In
a paper on individual industry returns and the potential of selected industries to predict
stock market movements, the authors found that 14 out of the 34 industries studied,
forecasted the US market (Hong et al., 2007). These included retail, finance, and services,
among others. Ponka (2017) built on Hong et al.’s paper by looking at the directional
predictability of industry data. The findings resulted in fewer significant industries, with
the finance sector still among them.
Another area of focus is how fundamental valuation factors differ in significance by
industry. For example, a study of the coal mining industry in Indonesia reported that
284 T. Brahmasrene and D. Whitten

when examined individually, earning per share (EPS) was significant in terms of stock
price, but return on assets (ROA) was not (Idawati and Wahyudi, 2015). However, when
examined jointly, both were positively significant. For selected industries in Pakistan,
including sugar, food, chemical, and energy, dividend yield, dividend payout, EPS, and
profit were all significant, while return on equity (ROE) was not (Hunjra et al., 2014).
Interestingly, dividend yield had a positive impact on stock price, while dividend payout
had a negative influence. Automobile and IT industries in India were studied with EPS,
BV, and price earnings (PE) ratio reporting statistical significance, but dividend yield was
not (Geetha and Swaaminathan, 2015).
Finally, macroeconomic variables have been investigated using time series data for
their impact on particular industries. Research on four industries in Pakistan revealed that
several macroeconomic factors, such as exchange rates, consumer price index, and
interest rates differ in significance by industry (Jasra et al., 2012). Ozlen’s (2014) study
of firms in Istanbul showed that industry presents implications in terms of the
significance of the same factors mentioned in the previous study and several others, such
as the unemployment rate and current account deficit. For US markets, two studies on
macroeconomic factors revealed significant variables on stock price. First, Azar (2014)
found that inflation, inflation uncertainty, and foreign exchange rates influence US stock
market returns. Additionally, Antonakakis et al. (2013) reported that policy uncertainty,
oil price shocks, and recessions all impacted the market. Clearly, the influence of industry
on stock prices is an area worthy of further study. As such, the literature influenced the
hypotheses noted in the next section.

2.3 Investor sentiment and stock price

While fundamental valuation, using company-specific data, remains an important factor
in stock prices, physiological factors also play a role (Chavan and Patil, 2013). The field
of behavioural finance is defined as a social science perspective and analyses the
behaviour of investors from a psychological standpoint (Lopez-Cabarcos et al., 2019).
The area has experienced an increase in interest, as evidenced by the rapid growth in
published papers, while continuing to lack concurrence in some areas. As such, continued
research is warranted.
A specific area of this behavioural field involves investor sentiment, which is defined
as the attitude of investors towards a firm’s potential, in terms of cash flows and risks, not
based on fundamental valuation factors (Baker and Wurgler, 2007). This behavioural
construct reflects the optimism, or pessimism, of investors (Baker and Wurgler, 2006).
Studies have focused on several areas regarding sentiment. For example, Baker and
Wurgler (2007) looked at predicting stock returns using sentiment. Gupta (2019)
established that manager sentiment is related to investor sentiment and that it can predict
both returns and volatility. Rapp (2019) distinguished sentiment from mood and
determined they have different empirical impacts. Mukherjee and De (2019) focused on
the degree of rationality, vs. non-rationality, and the balance between the two positions.
Murphy and Fu (2019) explained what initiates calendar month effects and the
interrelationship between items including collective market sentiment.
Currently, the literature on the relationship between investor sentiment and stock
prices has led to the well-accepted conclusion that investor sentiment can explain some of
the divergence of stock prices from the fundamentals (Baker and Wurgler, 2007; Shefrin,
2008). Several proxies have been identified to represent investor sentiment and these
 The influence of investor sentiment on stock prices among industries in the US 285

have been applied to single stocks, industries, and the market as a whole (Chen et al.,
2013; Jame and Tong, 2014; Joseph et al., 2011). Further, there is evidence that the
relationship between stock returns and sentiment may differ for optimistic vs. pessimistic
regimes (Chen et al., 2013). To date, there lacks a consensus on a single measure of the
metric (Baker and Wurgler, 2006; Concetto and Ravazzolo, 2019).
This study utilises an enhanced version of the stock-specific, market-based measure
used by Rapp (2019), which includes the stock price to book ratio. High ratios are an
indicator of investor optimism that a particular company will produce more benefit from
their assets than another company with a lower ratio (Donnelly, 2014). Quantitatively,
price to book ratios that equal one or more are an indication of optimism, and those with
values below one are interpreted to be a sign of pessimism (“Price-to-Book or P/B
Ratio”, n.d.; Papakyriakou et al., 2019). Building on these studies, this paper used an
indicator variable for the investor sentiment variable, with 1 indicating optimism and 0 to
represent pessimism. Hence, based on the issues and discussion raised in this section and
the previous one, the following hypothesis is generated for further verification:
Hypothesis 1: The stock prices of US firms are affected by DEPS, BV, DIV, FCF,
investor sentiment variable (optimism = 1; pessimism = 0), and industry sector
indicator variable (industry = 1; otherwise 0) for finance, manufacturing, retail
wholesale, and service industry sectors, ceteris paribus.
Although investor sentiment has been researched as a predictor, it may also reveal
investors attitudes, in select industries, towards variables that have been significant on
stock price in previous studies. These include diluted earnings per share (DEPS), book
value per share (BV), dividends per share (DIV), free cash flow per share (FCF), and
investor sentiment. Recall the study, discussed in the previous section, of firms in
Istanbul, which noted that industry presents implications in terms of the significance of
other factors noted in the literature (Ozlen, 2014). Thus, guided by the literature, three
additional hypotheses are developed:
Hypothesis 2: The stock prices of US firms for the industry sectors of financing,
manufacturing, retail wholesale, and service are affected by the investor sentiment
indicator variable (optimism = 1; pessimism = 0), ceteris paribus.
Hypothesis 3: There exists a difference in impact of DEPS, BV, DIV, and FCF on
stock price when investor sentiment is optimistic for firms in the US for the industry
sectors of finance and manufacturing.
Hypothesis 4: There exists a difference in impact of DEPS, BV, DIV, and FCF on
stock price when investor sentiment is pessimistic for firms in the US for the industry
sectors of finance and manufacturing.

3 Methodology and data

To test the hypotheses in this study, the ordinary least square (OLS) method was
employed. Data was collected using the Wharton Research Data Services (WRDS).
Search criteria included companies with fiscal year ends in 2018. Since the majority of
studies on investor sentiment have focused on US market, due to its influence, the search
criteria included only companies in the US (Concetto and Ravazzolo, 2019). Therefore,
286 T. Brahmasrene and D. Whitten

due to the use of cross-sectional data that focuses on one country, US, macroeconomic
factors were not included. The search returned a population of 1670 companies. The data
was tested for outliers, which resulted in the removal of six firms for a sample size of
1664 companies.
Three variables were computed. First, free cash flow (FCF) per share was calculated
using a common measure utilised by analysts, operating cash flows minus capital
expenditures (Pizam, 2010; “The Ultimate”, 2018). Next, a measure of company specific
investor sentiment employed the method described by Rapp (2019), the individual stock’s
price to book ratio. The ratio was then converted to an indicator variable where a ratio of
1 or above was interpreted as a sign of optimism, and below 1, an indication of
pessimism (“Price-to-Book-P/B Ratio”, n.d.; Papakyriakou et al., 2019). Finally, four
dummy industry variables were constructed for finance (FIN = 1, 0 otherwise),
manufacturing (MANU = 1, 0 otherwise), retail wholesale (RETWHS = 1, 0 otherwise),
and services (SERV = 1, 0 otherwise).

4 Results and discussion

Table 1 presents summary statistics of the variables in this study while a list of
correlation among the variables is also reported in Table 2. The expected correlation
among stock price (SP), diluted earnings per share (DEPS), FCF per share, book value
per share (BV), and dividends per share (DIV) are evident in the associations.
Furthermore, all models are tested for the assumption of linear multiple regression and
fitness by the residual analysis with no apparent violation in the pattern of the plot in
residuals and independent variables.

Table 1 Summary statistics of the variables

N Minimum Maximum Mean

SP 1664 0.0003 283.5800 27.361926
DEPS 1664 –47.5200 69.5900 0.5675
FCF 1664 –42.8222 37.7334 0.7594
BV 1664 –127.4366 202.8994 10.9383
DIV 1664 0.0000 10.6500 0.426724
Valid N (listwise) 1664

According to the computed values of a multiple regression model in Table 3, the null
hypothesis is rejected with a statistically significant p < 0.001 (F test = 217.487). This
means that there exists a relationship between stock price and the explanatory variables;
the company’s DEPS, FCF, BV, DIV, all four industries (FIN, MANU, RETWHS,
SERV), and investor sentiment. Furthermore, significant test (t-test) for each independent
variable indicates that DEPS, FCF, BV, DIV, FIN, SERV and investor sentiment are
statistically significant at p < 0.001 while significant t value of MANU, RETWHS are
statistically significant at p < 0.01 and 0.05, respectively. In brief, all variables positively
impact stock price, with the exception of FIN which has a negative impact. The
coefficient of multiple determination (R Square = 0.542) indicated that 54.2% of
variation in the stock price could be explained by the variations of these variables.
 The influence of investor sentiment on stock prices among industries in the US 287

Table 2 Correlation matrix of the variables

SP DEPS FCF BV DIV

** ** **
SP Pearson Correlation 1 0.297 0.373 0.574 0.533**
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 1664 1664 1664 1664 1664
** ** **
DEPS Pearson Correlation 0.297 1 0.133 0.210 0.221**
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 1664 1664 1664 1664 1664
FCF Pearson Correlation 0.373** 0.133** 1 0.211** 0.272**
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 1664 1664 1664 1664 1664
** ** **
BV Pearson Correlation 0.574 0.210 0.211 1 0.382**
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 1664 1664 1664 1664 1664
DIV Pearson Correlation 0.533** 0.221** 0.272** 0.382** 1
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 1664 1664 1664 1664 1664
**Correlation is significant at the 0.01 level (2-tailed).

Table 3 Regression analysis of both optimism and pessimism

Variables Coefficients Std. error

(Constant) –0.585 1.591
DEPS 0.819*** 0.126
FCF 1.664*** 0.164
BV 0.857*** 0.040
DIV 12.766*** 0.783
FIN –6.240*** 1.883
MANU 4.853** 1.630
RETWHS 5.639* 2.519
SERV 8.528*** 1.985
Sentiment 12.462*** 1.361
R Square 0.542
F Test 217.487***
Dependent variable is stock price.
*p < 0.05, **p < 0.01, ***p < 0.001.

These four significant industries are further investigated to determine whether investor
sentiment influences stock price in each of these industries. The number of companies in
each industry are 307 for finance (FIN), 607 in manufacturing (MANU), 123 under retail
and wholesale (RETWHS), and 263 companies in services (SERV).
288 T. Brahmasrene and D. Whitten

Due to the highly significant (p < 0.001) as F test for FIN, MANU, RETWHS and
SERV at 120.679, 191.273, 59.272 and 87.254 respectively, the null hypothesis is
rejected so that among these industries, there is relationship between the stock price and
the explanatory variables. As shown in Table 4, the results of the four regression models
are highly significant for all four industries with p < 0.001, while R Square for each
industry, FIN, MANU, RETWHS and SERV, reports 0.666, 0.614, 0.715 and 0.628,
respectively. However, investor sentiment has a significant influence on stock price in
FIN and MANU, but does not appear to be a significant predictor in RETWHS and
SERV industry. Therefore, these two industries are not included in the subsequent
analysis to explore the relationship of DEPS, FCF, BV, and DIV by industry. Due to the
significance of the investor sentiment indicator variable, the next step dissects investor
sentiment into optimistic and pessimistic behaviour. The number of companies under
study for optimism is 201 firms for finance and 475 firms for manufacturing, while for
pessimism there are 105 companies in finance and 131 companies in manufacturing.

Table 4 Regression analysis both optimism and pessimism by industry

FIN MANU RETWHS SERV

Std. Std. Std. Std.
Variables Coef. error Coef. error Coef. error Coef. error
(Constant) 1.326 1.913 3.931* 2.034 12.340*** 3.566 5.531 3.272
DEPS 6.401*** 0.726 0.956* 0.400 9.804*** 1.119 1.086** 0.437
FCF 0.326 0.228 2.500*** 0.486 0.341 0.727 2.676*** 0.357
BV 0.321*** 0.068 1.155*** 0.093 0.046 0.157 1.508*** 0.115
DIV 9.726*** 1.396 14.801*** 1.507 10.103*** 1.711 14.614*** 2.701
Sentiment 8.758*** 2.161 8.073*** 2.388 3.192 4.631 5.933 3.834
R Square 0.666 0.614 0.715 0.628
F Test 120.679*** 191.273*** 59.272*** 87.254***
Dependent variable is stock price.
*p < 0.05, **p < 0.01, ***p < 0.001.

The results in Table 5 imply the existence of difference in terms of investor sentiment
projecting on key financial variables such as DEPS, FCF, BV, and DIV. Table 5 displays
how these variables affect stock price under investor sentiment with optimism, while
Table 6 represents investor sentiment with pessimism.
The results of a multiple regression for FIN model in Tables 5 and 6 indicate rejection
of the null hypothesis at p < 0.001. As a result, there is relationship between stock price
and the explanatory variables. While all explanatory variables, DEPS, FCF, BV, and
DIV, in varying degrees, affect stock prices for optimistic sentiment (i.e., DEPS p < 0.01,
FCF p < 0.05, BV and DIV p < 0.001), only two variables, DEPS and DIV, are
significant under pessimistic sentiment, with p < 0.01. In addition, the coefficient of
multiple determination (R Square = 0.839 and 0.313) indicated that 83.9% of variation in
the stock price can be explained by the variations of the company’s DEPS, FCF, BV, and
DIV if investor sentiment is optimistic while only 31.3% under pessimism.
 The influence of investor sentiment on stock prices among industries in the US 289

Table 5 Regression analysis with optimism

FIN MANU
Variables Coef. Std. error Coef. Std. error
(Constant) 0.589 1.419 9.302*** 1.507
DEPS 2.289** 0.823 1.616** 0.566
FCF 0.420* 0.201 1.700** 0.579
BV 1.288*** 0.107 1.503*** 0.115
DIV 7.360*** 1.314 13.884*** 1.676
R Square 0.839 0.634
F Test 256.334*** 204.704***
Dependent variable is stock price.
*p < 0.05, **p < 0.01, ***p < 0.001.

Table 6 Regression analysis with pessimism

FIN MANU
Variables Coef. Std. error Coef. Std. error
(Constant) 8.243*** 2.139 5.370*** 0.777
DEPS 3.868** 1.204 0.032 0.214
FCF 0.232 0.440 –0.041 0.501
BV 0.087 0.076 0.038 0.066
DIV 6.426** 2.425 4.398* 1.841
R Square 0.313 0.052
F Test 11.506*** 1.727
Dependent variable is stock price.
*p < 0.05, **p < 0.01, ***p < 0.001.

For the manufacturing model under optimism, the null hypothesis is rejected due to the
significant F test displayed in Table 5 (F = 204.704, p < 0.001). Therefore, when investor
sentiment is optimistic, there is relationship between stock price and the explanatory
variables. Further investigation of t-test for each independent variable indicate that DEPS
and FCF are significant with p < 0.01, while BV and DIV are highly significant with
p < 0.001. In effect, the stock price is positively and significantly related to the
company’s DEPS, FCF, BV, and DIV. In addition, the coefficient of multiple
determination (R Square = 0.634) indicates that 63.4% of variation in the stock price
could be explained by the variations of the company’s DEPS, FCF, BV, and DIV.
However, for manufacturing, under investor sentiment with pessimism (Table 6,
MANU), the results of a multiple regression model for this hypothesis implies acceptance
of the null hypothesis at p > .05. As a result, there is no relationship between stock price
and the explanatory variables; DEPS, FCF, BV, and DIV.
290 T. Brahmasrene and D. Whitten

5 Contribution and implication

This study adds to the literature on investor sentiment by examining highly significant
fundamental valuation factors on stock price within significant industries that are
impacted by investor sentiment. Most studies involving pricing have focused on time-
series data on markets or countries (Escobari and Jafarinejad, 2019; Murphy and Fu,
2019). These studies cannot pick out differences within a group and tend to focus on a
very small number of variables, at times as few as one (Chen et al., 2016). In addition,
they are considered appropriate for studies interested in forecasting, with some models
encountering problems. This study focused on the impact of investor sentiment on stock
prices for specific firms within a particular country, US. Although fewer in number,
research involving pricing have used cross-sectional data when appropriate (Duca and
Whitesell, 1995; Fischer, 2013; Lillis and Mundy, 2005). This is important since studies
using cross-sectional data of a particular population have advantages. For example, while
significant variables are not to be inferred as causal, the results allow for inferences
regarding possible relationships and support further research into specific areas of interest
(Wang and Cheng, 2020). This paper contributes an approach that explores the
significance of valuation factors separately under conditions of investor optimism vs.
pessimism. Moreover, the results of this study present a highly significant difference.
Contributions and implications are detailed below:
1 This study reports that four industry sectors in the US are statistically significant on
stock price. These include finance, manufacturing, retail wholesale, and service. The
results of this study are mostly supported by Hong et al. (2007) which found
significance for retail, finance, and services, and Ponka (2017) for which finance was
significant. Further, finance has a negative impact on stock price, while
manufacturing, retail wholesale, and service have a positive impact.
2 The findings in this study include information on the significance of fundamental
valuation factors and shows that they differ by industry. The results are in keeping
with Idawati and Wahyudi (2015), Hunjra et al. (2014), and Geetha and
Swaaminathan (2015). While this topic has been addressed in several studies, and it
is understood that these factors vary by country, this study provided additional
information in this area. The data provided includes information regarding industry
sectors in the US that are significant in terms of stock price and the fundamental
valuation factors that are significant in each of these industries.
3 The results of this study reported that investor sentiment is significant for two of the
four significant industries, namely finance and manufacturing. This allowed
exploration of differences between firms for which investors were more optimistic
about vs. those they displayed pessimism towards, which leads to the next
contribution.
4 This study explores investor sentiment under conditions of optimism separate from
those for which pessimism is demonstrated. The results indicate a significant
difference. First, for finance under both optimism and pessimism the model is
significant, but for manufacturing only the optimism model is significant. This
indicates that investors demonstrating pessimism towards specific firms in the
manufacturing sector seem to be looking at factors other than those included in
traditional company specific analyses.
 The influence of investor sentiment on stock prices among industries in the US 291

5 Then, the models under optimism for finance and manufacturing reveal significance
for all four fundamental valuation factors, including FCF. This finding is interesting
because under accounting reporting standards in the US, cash flow reporting is
prohibited in a company’s financial statements.
6 Next, under pessimism for the finance sector, only earnings per share and dividends
are significant, while cash flow per share and book value are not. This indicates that
investors may be taking an earnings outlook, rather than an asset approach, when
pessimistic investor sentiment exists.
7 Finally, information on differences in the significance of FCF under each of these
conditions is presented. Specifically, for firms in the financing sector when investor
sentiment reveals optimism, FCF per share is significant, but it is not significant for
firms in this sector when pessimism is demonstrated. For the manufacturing sector,
the same can be said in terms of optimism, FCF per share is significant, but for
pessimism, no conclusion can be drawn due to the insignificance of the model. This
is important as it demonstrates the impact of investor behaviour separate from
fundamental valuation factors, and therefore indicates that investor sentiment may
need to be viewed separately when there is an indication of optimism as opposed to
pessimism.

6 Conclusions and recommendations

The results of this research provides information on the impact of fundamental valuation
factors and a behavioural factor, investor sentiment, on stock price within significant
industries, in the US, for which optimism vs. pessimism is significant. Specifically, four
industry sectors are found to have a statistically significant impact on stock price,
finance, manufacturing, retail wholesale, and service. However, investor sentiment is
only significant in finance and manufacturing. Further, while the model for optimism is
significant for both sectors, it is only significant for the finance sector under pessimism.
Additionally, for the significant models, the explanatory power of the models is much
higher under optimism than for pessimism, which indicates factors not included must
impact stock prices more when investors are pessimistic, rather than optimistic, towards
particular firms within that sector.
Regarding significant industry sectors, one major difference emerges. While
manufacturing, retail wholesale, and service are all positively significant on stock price,
finance is negatively significant. This means that by virtue of being a firm in the finance
sector, stock prices are lower, whereas in the other industries it is higher. This result is
not surprising since the finance sector is somewhat different than other industries, namely
the business revolves around managing money rather than providing goods and services.
Also, many firms in the sector are banks and therefore their operations are influenced in
part by the Federal Reserve monetary policies in the US. These policies include
managing interest rates and affecting the availability of credit, influences not present in
other industries. Another possible reason could be the continued impact from the 2008
global financial crisis, which had an effect on long term finance regardless of whether or
not a particular country experienced a systematic banking crisis (Demirguc-Kunt et al.,
2015).
292 T. Brahmasrene and D. Whitten

In terms of fundamental valuation factors, the results for finance indicate that while
all of the fundamental valuation factors included are significant under investor optimism,
albeit at varying level of confidence, only DEPS and DIV are significant under
pessimism. This indicates that investors look to different fundamental valuation factors
depending on the investor sentiment towards that firm. Specifically, FCF and book value
are significant under optimism, but not when pessimism exists. This is important since it
indicates that investors are interested in cash and assets under optimism, but not so for
pessimism. When pessimistic about a particular firm within the finance industry, the most
basic and widely studied fundamental valuation factors, earnings per share and dividends
matter, but cash flow and book value per share do not.
For manufacturing, the results indicate similar results under optimism, but a different
situation emerges for pessimism. For optimism, the same four valuation factors were
significant, at similar levels of confidence, even as the explanatory power of the model is
a bit lower, 63.4% of the variance explained vs. 83.9% for finance. Under pessimism, the
model revealed no relationship between the stock price and the valuation variables
included in this study, DEPS, FCF, BV, and DIV. Therefore, different factors explain
stock prices in the manufacturing sector under investor optimism and pessimism. This
may be partially explained by the shift in the US beginning in 1970s from a
manufacturing economy to more service providing industries (Ghanbari and McCall,
2016). Perhaps investors remain confident regarding certain companies within the
industry, and therefore rely on fundamental valuation factors, but others may be regarded
as having a less favourable outlook due to the shift in the economy and, as such, different
factors drive those stock prices.
Finally, significance of FCF varied among significant industries. In particular, it is
significant for manufacturing and service sectors, but not for finance and retail wholesale.
That it is significant for any industry in the US is revealing due to the prohibition of the
Financial Accounting Standards Board (FASB) demonstrates towards firms reporting
this information in their financial statements. Further, the significance of FCF varied
under optimistic vs. pessimistic investor sentiment. For firms in the financing sector
under investor optimism, FCF per share is significant, but it is not significant under
pessimism. The manufacturing sector is the same under optimism, statistically
significant, but under pessimism no conclusion can be determined since the model is
insignificant.

7 Future research

The models for optimism display a high level of explanatory power for the included
variables, 83.9% of the variation in stock price explained for finance firms and 63.4% for
manufacturing, vs. only 31.3% explained with the significant model for finance firms
under pessimism and insignificant for manufacturing. As such, this area of research may
benefit from further study under these two diverse levels of investor sentiment.
Continued research into the various measures of investor sentiment, and how best each of
these measures might be included in studies, remains worthy of further investigation.
Specifically, maintaining the goal of reaching some level of concurrence on the measure,
and use, of this important influence on stock prices, should persist.
While this study focused on the company-specific level within selected industry
sectors, the results lead to other possible areas of focus for this type of analysis, for
 The influence of investor sentiment on stock prices among industries in the US 293

example at the market and country level. In addition, further examination of the impact of
macroeconomic factors under optimism as opposed to pessimism seems justified. The
difference in significant factors for finance and manufacturing sectors under optimism
and pessimism indicates the need for further study regarding the behavioural construct of
investor sentiment and its interrelatedness with fundamental valuation factors. Finally,
the focus of investors on FCF under optimism, but not for pessimism, may be an
indication of an interesting area to explore. This may be especially enlightening if
reviewed under differing accounting reporting standards, especially in light of the
divergence in attitude of the standard setters regarding cash flow reporting.

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