Optimism unleashed: managerial sentiment and stock liquidity

Purpose This research aims to examine the effect of managerial sentiment on the stock liquidity of firms listed in India. It further examines whether this relationship varies across stages of the corporate life cycle (CLC). Design/methodology/approach This research introduces a novel manager sentiment index that uses FinBERT, a large language model based on the bidirectional encoder representations from transformers, specifically tailored for financial text, and draws on Management Discussion and Analysis (MD&A) reports. Subsequently, a panel fixed-effects model is implemented to examine the effect of manager sentiment on stock liquidity. We conduct multiple robustness checks, including propensity score matching (PSM), instrumental variable (IV) estimation, and a two-step system generalized method of moments (GMM) approach. Additional cross-sectional and interaction-based heterogeneity analyses are also performed. Findings The empirical outcomes suggest that managers' optimistic sentiment positively impacts stock liquidity. This favorable relationship is robust even after conducting various endogeneity tests: PSM, IV methods, and system GMM. Furthermore, our study explores the role of CLC and demonstrates that the positive impact of managerial sentiment is only evident during the growth and maturity stages. The heterogeneity analysis reveals that this positive nexus is particularly substantial for smaller firms, those facing financial constraints, and companies lacking environmental, social and governance ratings. Practical implications The findings highlight the strategic importance of narrative disclosures for managers, investor relations teams and regulators and demonstrate how sentiment analytics can improve stock liquidity assessment and informed trading decisions. Originality/value To the best of our knowledge, this is the first study to examine the relationship between FinBERT-based managerial sentiment and stock liquidity, particularly in an emerging market context.