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Manager Sentiment and Stock Returns

This paper constructs a manager sentiment index based on the aggregated textual tone of corporate financial disclosures. We find that manager sentiment is a strong negative predictor of future aggregate stock market returns, with monthly in-sample and out-of-sample R2s of 9.75% and 8.38%, respectively, which is far greater than the predictive power of other previously studied macroeconomic variables. Its predictive power is economically comparable and is informationally complementary to existing measures of investor sentiment. Higher manager sentiment precedes lower aggregate earnings surprises and greater aggregate investment growth. Moreover, manager sentiment negatively predicts cross-sectional stock returns, particularly for firms that are difficult to value and costly to arbitrage.