Abstract
The impact of stock sentiment risk on their returns has been well documented in literature, but exploration into the determinants of stock sentiment risk is lacking. We theorize that concentrated customer bases help mitigate stock sentiment risk. Empirical results based on a large sample from the U.S. market strongly support this hypothesis. Specifically, the mitigating effect takes place through three channels. Companies with high customer concentration tend to have better performance and information quality and attract more long-horizon institutional investors. All these factors contribute to diminishing stock sentiment risk. The results are robust when the endogeneity concern is addressed by investigating the effect of an exogenous shock, or when they are examined with alternative measures of sentiment risk. The negative relationship between customer concentration and stock sentiment risk is ubiquitous but even stronger during the 2008 financial crisis.
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Notes
The idea that stocks’ systematic risk can be explained by firm fundamentals is prevalent. For example, Campbell et al. (2010) argue that the betas of growth and value stocks are determined by the cash-flow fundamentals of these companies. Ng (2011) links liquidity risk to companies’ information quality, and Cao and Petrasek (2014) demonstrate that certain types of institutional ownership lower liquidity risk of stocks.
We appreciate a reviewer making these suggestions.
We appreciate the valuable comments by the reviewers that suggest explorations into the impact of data frequency, foreign sales, and firm age.
To formally test the potential impact of thin trading, we follow Miller et al. (1994) to adjust stock returns for thin trading. Then we rerun the main regressions with the adjusted sentiment beta, whose results are consistent with those in the paper and are thus unreported.
For a robustness test on this issue, we assign delisting-month returns following Shumway (1997) and Shumway and Warther (1999). We also employ the Heckman (1979) model to test the possible impact of delisting bias on our main results. The untabulated results are consistent with those reported in the paper and thus refute concerns for delisting and survivorship bias.
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Acknowledgements
We thank Ramesh Rao for helpful comments.
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Wang and Huang acknowledge financial support from the National Natural Science Foundation of China (Grant Numbers 71571038 and 71971048), the Fundamental Research Funds for Central Universities in China (Grant Number N2006010) and LiaoNing Revitalization Talents Program in China (Grant Number XLYC1907015).
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Appendix A: description of main variables
Appendix A: description of main variables
Variable name | Description |
|---|---|
\(\beta^{ST4}\) | Sentiment beta of stocks obtained from Carhart four-factor model, following Baker and Wurgler (2006) |
\(\beta^{ST1}\) | Sentiment beta of stocks obtained from market single-factor model (CAPM) |
\(\beta^{ST3}\) | Sentiment beta of stocks obtained from Fama–French there-factor model |
\(\beta^{CCI}\) | Sentiment beta of stocks based on Consumer Confidence Index (CCI), following Keiber and Samyschew (2019) |
Concus | HHI ratio of Customer Concentration as defined in Patatoukas (2012) |
InstTO | Institutional investor turnover as proposed by Gaspar et al. (2005) |
Audit_fee | Audit fees in $US thousands from Audit Analytics |
Total_fee | The sum of audit and audit-related fees in $US thousands from Audit Analyticsa |
Restatement | An indicator variable for restatements of previously audited financial statementsb |
Leverage | The ratio of total debt divided by total asset |
mtb | The ratio of the market value of equity to the book value of equity measured at the beginning of the fiscal year |
ppe | The ratio of net PP&E to the total asset |
Cash | The ratio of cash and all securities readily transferable to cash as listed in the Current Asset section to the total assets |
cf_na | The ratio of the Operating Income Before Depreciation (OIBDP) to non-current assets |
nwc_na | The working capital minus cash and short-term investments, divided by the non-current assets |
Capex | The ratio of capital expenditures to non-current assets |
rd | Research and development expenditure divided by total assets |
Log_at | The natural log of total assets |
inst_ratio | Institutional ownership, defined as the equity held by institutional investors at the end of the last quarter in fiscal year t |
lnage | The natural log of the number of years since IPO |
roa | The return-on-assets calculated as the ratio of operating income after depreciation divided by total assets |
sg | The annual percentage of growth rate in sales |
Loss | An indicator variable for negative operating income after depreciationc |
Debtmaturity | The ratio of short-term debt to total debt |
Foreign | An indicator variable for foreign income or foreign income taxesd |
△csale | The year-over-year growth in cash sales, where cash sales is calculated as sales minus the change in accounts receivables |
△roa | The year-over-year change in return-on-assets |
Soft | The ratio of total assets minus net PP&E minus cash and cash equivalents divided by total assets |
gp | The firm’s gross profitability as revenues minus cost of goods sold, scaled by total assets following Novy-Marx (2013) |
Ebitda | Earnings before interest, tax, depreciation and amortization scaled by the market value of equity |
∆sale | Sales growth from year t to year t + 1 |
cfvol | The annualized standard deviation of cash flow in 5 years |
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Wang, J., Huang, Y., Feng, H. et al. The effect of customer concentration on stock sentiment risk. Rev Quant Finan Acc 60, 565–606 (2023). https://doi.org/10.1007/s11156-022-01104-5
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DOI: https://doi.org/10.1007/s11156-022-01104-5