Investigating the effect of investor sentiment on stock return sensitivity to fundamental factors: case of JSE listed companies

This study examines the association between a firm’s fundamental factors and stock returns as well as how investor sentiment influences the association between these variables. The fundamental factors analyzed include accounting variables (earnings yields, change in profitability, and capital investment) and earnings quality measures. Investor sentiment is measured using the South African consumer confidence index. A sample of 1 386 firm-year observations from the companies listed on the Johannesburg Stock Exchange (JSE) between 1990 and 2022 was used. The results show that fundamental factors are related to stock returns, except for measures of earnings quality. Although earnings yields and capital investments cause variation in stock returns, their effects on stock returns are influenced by other variables associated with stock returns. In addition, investor sentiment affects the relationship between fundamental factors and stock returns, suggesting that sentiment influences the outcome of the capital market and the way investors process fundamental information. Profitability seems to be more related to stock returns than other fundamental variables. This study sheds light on how sentiment interacts with a set of fundamental factors and their sensitivity to stock returns and highlights the important role of investor sentiment and accounting information in the capital market.