Business sentiment and the cross-section of global equity returns

Adam Zaremba (), Adam Szyszka, Huaigang Long and Dariusz Zawadka

Pacific-Basin Finance Journal, 2020, vol. 61, issue C

Abstract: This study is the first to examine the relationship between business sentiment and future equity returns in the cross-section of countries. We demonstrate that high-sentiment markets outperform low-sentiment markets. A spread portfolio buying (selling) the quintile of countries with the highest (lowest) managerial sentiment yields a monthly return of 0.51% and is robust to many control variables. We link the observed phenomenon with the sentiment-chasing mechanism. In line with these behavioral roots, the effect is stronger in hard-to-value markets with elevated limits to arbitrage and in markets based in countries with collectivistic national cultures. Also, the overpricing is temporary: it is eventually reversed, erasing the initial profits. Finally, we demonstrate that practical implementation of the documented effect by international investors may be challenging.

Keywords: Business sentiment; Managerial sentiment; The cross-section of stock returns; International asset pricing; Return predictability; Business confidence (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 G41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:61:y:2020:i:c:s0927538x20301554

DOI: 10.1016/j.pacfin.2020.101329

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