The Impact of Cognitive Dissonance on Abnormal Returns under Investor Sentiment Heterogeneity
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Abstract
This study examines the impact of positive and negative accounting earnings news on the cumulative abnormal returns (CAR) of banks, focusing on the mediating role of investor sentiment (optimism and pessimism) in the Iraq Stock Exchange. Analyzing a sample of 10 listed banks from 2011 to 2023 with 520 quarterly observations, the research utilized a three-day event window for CAR and "overnight return" as a sentiment proxy. The results indicate an asymmetric market reaction, where investors respond more strongly to good news than bad news. Furthermore, the interactive model reveals that sentiment amplifies reactions when aligned with news and suppresses them when contradictory: optimism boosts the momentum of good news while dampening bad news, whereas pessimism intensifies the impact of bad news while muting the response to good news. Ultimately, the study concludes that investor psychology serves as the primary driver of returns in the Iraqi market, surpassing the influence of structural factors such as bank size and financial leverage.
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