Investor sentiment, credit rating, and stock returns

Jong Hwa Lee, Taeyoon Sung and Sung Won Seo

International Review of Economics & Finance, 2022, vol. 80, issue C, 1076-1092

Abstract: We confront the distress risk puzzle. Conventionally, stocks with high distress risk should yield higher returns. However, this notion is found to be empirically inaccurate. We develop a stock-level investor sentiment measure and find that behaviors of individual investors affect the future excess returns of stocks despite the presence of distress risk. Our findings suggest that net buying by individual investors enhances our understanding of the negative relationship between credit ratings and future stock returns. To do so, we develop a cross-sectional measure of the investor sentiment for each individual stock at each month.

Keywords: Investor sentiment; Credit rating; Buy–sell imbalance; Individual stock returns (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:80:y:2022:i:c:p:1076-1092

DOI: 10.1016/j.iref.2022.04.002

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